Looking For Steady Income For Your Dividend Portfolio? Is Grupo Sanborns, S.A.B. de C.V. (BMV:GSANBORB-1) A Good Fit?

Today we'll take a closer look at Grupo Sanborns, S.A.B. de C.V. (BMV:GSANBORB-1) 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. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

With a eight-year payment history and a 4.9% yield, many investors probably find Grupo Sanborns. de intriguing. We'd agree the yield does look enticing. There are a few simple ways to reduce the risks of buying Grupo Sanborns. de for its dividend, and we'll go through these below.

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

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Grupo Sanborns. de paid out 144% of its profit as dividends. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Grupo Sanborns. de paid out a conservative 41% of its free cash flow as dividends last year. 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 Sanborns. de fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

While the above analysis focuses on dividends relative to a company's earnings, we do note Grupo Sanborns. de's strong net cash position, which will let it pay larger dividends for a time, should it choose.

We update our data on Grupo Sanborns. de every 24 hours, so you can always get our latest analysis of its financial health, here.

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. Looking at the last decade of data, we can see that Grupo Sanborns. de paid its first dividend at least eight years ago. Its dividend has not fluctuated much that time, which we like, but we're conscious that the company might not yet have a track record of maintaining dividends in all economic conditions. During the past eight-year period, the first annual payment was Mex$0.8 in 2013, compared to Mex$0.9 last year. This works out to be a compound annual growth rate (CAGR) of approximately 2.4% a year over that time.

Modest dividend growth is good to see, especially with the payments being relatively stable. However, the payment history is relatively short and we wouldn't want to rely on this dividend too much.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Grupo Sanborns. de's earnings per share have shrunk at 13% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're not keen on the fact that Grupo Sanborns. de paid out such a high percentage of its income, although its cashflow is in better shape. Earnings per share are down, and to our mind Grupo Sanborns. de has not been paying a dividend long enough to demonstrate its resilience across economic cycles. Overall, Grupo Sanborns. 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.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 2 warning signs for Grupo Sanborns. de that you should be aware of before investing.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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