Here's What You Should Know About Grupo Herdez, S.A.B. de C.V.'s (BMV:HERDEZ) 2.2% Dividend Yield

Today we'll take a closer look at Grupo Herdez, S.A.B. de C.V. (BMV:HERDEZ) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

A 2.2% yield is nothing to get excited about, but investors probably think the long payment history suggests Grupo Herdez. de has some staying power. The company also bought back stock during the year, equivalent to approximately 5.9% of the company's market capitalisation at the time. That said, the recent jump in the share price will make Grupo Herdez. de's dividend yield look smaller, even though the company prospects could be improving. There are a few simple ways to reduce the risks of buying Grupo Herdez. de for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Grupo Herdez. de!

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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Grupo Herdez. de paid out 60% of its profit as dividends. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Grupo Herdez. de paid out 79% of its cash flow last year. This may be sustainable but it does not leave much of a buffer for unexpected circumstances. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Remember, you can always get a snapshot of Grupo Herdez. de'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. Grupo Herdez. de has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was Mex$0.5 in 2011, compared to Mex$1.1 last year. This works out to be a compound annual growth rate (CAGR) of approximately 8.2% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Grupo Herdez. de might have put its house in order since then, but we remain cautious.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Over the past five years, it looks as though Grupo Herdez. de's EPS have declined at around 2.5% a year. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.

Conclusion

To summarise, shareholders should always check that Grupo Herdez. de's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Grupo Herdez. de's is paying out more than half its income as dividends, but at least the dividend is covered by both reported earnings and cashflow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Overall, Grupo Herdez. de falls short in several key areas here. Unless the investor has strong grounds for an alternative conclusion, we find it hard to get interested in a dividend stock with these characteristics.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 5 warning signs for Grupo Herdez. de (1 is a bit unpleasant!) that you should be aware of before investing.

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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