Why It Might Not Make Sense To Buy Fomento Económico Mexicano, S.A.B. de C.V. (BMV:FEMSAUBD) For Its Upcoming Dividend

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. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Fomento Económico Mexicano. de's shares on or after the 24th of April, you won't be eligible to receive the dividend, when it is paid on the 25th of April.

The company's upcoming dividend is Mex$3.67275 a share, following on from the last 12 months, when the company distributed a total of Mex$14.69 per share to shareholders. Based on the last year's worth of payments, Fomento Económico Mexicano. de stock has a trailing yield of around 7.1% on the current share price of Mex$207.58. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Fomento Económico Mexicano. de can afford its dividend, and if the dividend could grow.

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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. Fomento Económico Mexicano. de paid out more than half (62%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 100% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

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. Were this to happen repeatedly, this would be a risk to Fomento Económico Mexicano. de's ability to maintain its dividend.

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 strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Fomento Económico Mexicano. de, with earnings per share up 5.8% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Fomento Económico Mexicano. de has lifted its dividend by approximately 21% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Should investors buy Fomento Económico Mexicano. de for the upcoming dividend? Fomento Económico Mexicano. de is paying out a reasonable percentage of its income and an uncomfortably high 100% of its cash flow as dividends. At least earnings per share have been growing steadily. It's not that we think Fomento Económico Mexicano. de is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Fomento Económico Mexicano. de and want to know more, you'll find it very useful to know what risks this stock faces. To help with this, we've discovered 1 warning sign for Fomento Económico Mexicano. de that you should be aware of before investing in their shares.

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.