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. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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. This means that investors who purchase Fomento Económico Mexicano. de's shares on or after the 15th of January will not receive the dividend, which will be paid on the 16th of January.

The company's upcoming dividend is Mex$1.8694 a share, following on from the last 12 months, when the company distributed a total of Mex$4.40 per share to shareholders. Calculating the last year's worth of payments shows that Fomento Económico Mexicano. de has a trailing yield of 2.6% on the current share price of Mex$170.69. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Fomento Económico Mexicano. de has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Fomento Económico Mexicano. de

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Fomento Económico Mexicano. de paid out 51% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Fomento Económico Mexicano. de generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 207% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since Fomento Económico Mexicano. de is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend 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. Were this to happen repeatedly, this would be a risk to Fomento Económico Mexicano. de's ability to maintain its dividend.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Fomento Económico Mexicano. de, with earnings per share up 6.6% 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.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Fomento Económico Mexicano. de has increased its dividend at approximately 7.2% 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? Earnings per share have grown somewhat, although Fomento Económico Mexicano. de paid out over half its profits and the dividend was not well covered by free cash flow. 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.

Wondering what the future holds for Fomento Económico Mexicano. de? See what the 15 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.