Don't Race Out To Buy REN - Redes Energéticas Nacionais, SGPS, S.A. (ELI:RENE) Just Because It's Going Ex-Dividend

By
Simply Wall St
Published
May 05, 2021
ENXTLS:RENE

It looks like REN - Redes Energéticas Nacionais, SGPS, S.A. (ELI:RENE) is about to go ex-dividend in the next day or so. If you purchase the stock on or after the 7th of May, you won't be eligible to receive this dividend, when it is paid on the 11th of May.

REN - Redes Energéticas Nacionais SGPS's upcoming dividend is €0.17 a share, following on from the last 12 months, when the company distributed a total of €0.17 per share to shareholders. Based on the last year's worth of payments, REN - Redes Energéticas Nacionais SGPS stock has a trailing yield of around 6.9% on the current share price of €2.485. 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 check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for REN - Redes Energéticas Nacionais SGPS

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. Last year, REN - Redes Energéticas Nacionais SGPS paid out 104% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Dividends consumed 55% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and REN - Redes Energéticas Nacionais SGPS 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. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
ENXTLS:RENE Historic Dividend May 5th 2021

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. 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 discomforted by REN - Redes Energéticas Nacionais SGPS's 5.5% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. REN - Redes Energéticas Nacionais SGPS's dividend payments are effectively flat on where they were 10 years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.

The Bottom Line

Is REN - Redes Energéticas Nacionais SGPS an attractive dividend stock, or better left on the shelf? Earnings per share have been shrinking in recent times. Additionally, REN - Redes Energéticas Nacionais SGPS is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. Bottom line: REN - Redes Energéticas Nacionais SGPS has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in REN - Redes Energéticas Nacionais SGPS and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 2 warning signs for REN - Redes Energéticas Nacionais SGPS that we recommend you consider before investing in the business.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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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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