Is Grupo Lala, S.A.B. de C.V. (BMV:LALAB) An Attractive Dividend Stock?

Is Grupo Lala, S.A.B. de C.V. (BMV:LALAB) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

In this case, Grupo Lala. de likely looks attractive to dividend investors, given its 4.2% dividend yield and seven-year payment history. It sure looks interesting on these metrics - but there's always more to the story. The company also bought back stock during the year, equivalent to approximately 0.8% of the company's market capitalisation at the time. Some simple research can reduce the risk of buying Grupo Lala. de for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Grupo Lala. de paid out 198% of its profit as dividends, over the trailing twelve month period. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Of the free cash flow it generated last year, Grupo Lala. de paid out 25% as dividends, suggesting the dividend is affordable. It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Grupo Lala. de fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Consider getting our latest analysis on Grupo Lala. de's financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Grupo Lala. de has been paying a dividend for the past seven years. It's good to see that Grupo Lala. de has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past seven-year period, the first annual payment was Mex$0.6 in 2014, compared to Mex$0.6 last year. The dividend has shrunk at a rate of less than 1% a year over this period.

We struggle to make a case for buying Grupo Lala. de for its dividend, given that payments have shrunk over the past seven years.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Grupo Lala. de's EPS have fallen by approximately 28% 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 Grupo Lala. de's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Grupo Lala. de'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 not keen on the fact that Grupo Lala. de paid out such a high percentage of its income, although its cashflow is in better shape. 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 Grupo Lala. de may not be an ideal dividend stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 3 warning signs for Grupo Lala. de (1 is a bit concerning!) that you should be aware of before investing.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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