Don't Buy Fomento Económico Mexicano, S.A.B. de C.V. (BMV:FEMSAUBD) For Its Next Dividend Without Doing These Checks

Readers hoping to buy Fomento Económico Mexicano, S.A.B. de C.V. (BMV:FEMSAUBD) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Therefore, if you purchase Fomento Económico Mexicano. de's shares on or after the 16th of October, you won't be eligible to receive the dividend, when it is paid on the 17th of October.

The company's next dividend payment will be Mex$3.67275 per share, on the back of last year when the company paid a total of Mex$14.69 to shareholders. Based on the last year's worth of payments, Fomento Económico Mexicano. de has a trailing yield of 8.4% on the current stock price of Mex$173.92. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 89% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year, it paid out dividends equivalent to 236% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Fomento Económico Mexicano. de intends to continue funding this dividend, or if it could be forced to cut the payment.

Fomento Económico Mexicano. de paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Fomento Económico Mexicano. de to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

View our latest analysis for Fomento Económico Mexicano. de

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see Fomento Económico Mexicano. de's earnings per share have been shrinking at 2.1% a year over the previous five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Fomento Económico Mexicano. de has delivered an average of 21% per year annual increase in its dividend, based on the past 10 years of dividend payments. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Fomento Económico Mexicano. de is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

The Bottom Line

Should investors buy Fomento Económico Mexicano. de for the upcoming dividend? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

So if you're still interested in Fomento Económico Mexicano. de despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Case in point: We've spotted 2 warning signs for Fomento Económico Mexicano. de you should be aware of.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.