Investors In Nemak, S. A. B. de C. V. (BMV:NEMAKA) Should Consider This, First

Dividend paying stocks like Nemak, S. A. B. de C. V. (BMV:NEMAKA) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

With a 1.8% yield and a five-year payment history, investors probably think Nemak S. A. B. de C. V looks like a reliable dividend stock. A 1.8% yield is not inspiring, but the longer payment history has some appeal. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Explore this interactive chart for our latest analysis on Nemak S. A. B. de C. V!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. While Nemak S. A. B. de C. V pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Nemak S. A. B. de C. V paid out 10% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable.

Remember, you can always get a snapshot of Nemak S. A. B. de C. V's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Looking at the data, we can see that Nemak S. A. B. de C. V has been paying a dividend for the past five years. During the past five-year period, the first annual payment was Mex$0.6 in 2016, compared to Mex$0.1 last year. Dividend payments have fallen sharply, down 82% over that time.

A shrinking dividend over a five-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Nemak S. A. B. de C. V's EPS have fallen by approximately 37% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Nemak S. A. B. de C. V's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Nemak S. A. B. de C. V's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. With this information in mind, we think Nemak S. A. B. de C. V may not be an ideal dividend stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Nemak S. A. B. de C. V has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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