Here's Why We're Wary Of Buying AGCO's (NYSE:AGCO) For Its Upcoming Dividend

It looks like AGCO Corporation (NYSE:AGCO) is about to go ex-dividend in the next three days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Thus, you can purchase AGCO's shares before the 15th of May in order to receive the dividend, which the company will pay on the 16th of June.

The company's next dividend payment will be US$0.29 per share. Last year, in total, the company distributed US$3.66 to shareholders. Based on the last year's worth of payments, AGCO stock has a trailing yield of around 3.7% on the current share price of US$99.34. If you buy this business for its dividend, you should have an idea of whether AGCO's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

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Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. AGCO reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out 17% of its free cash flow as dividends last year, which is conservatively low.

See our latest analysis for AGCO

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. AGCO was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. AGCO has delivered an average of 24% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Remember, you can always get a snapshot of AGCO's financial health, by checking our visualisation of its financial health, here.

To Sum It Up

Is AGCO an attractive dividend stock, or better left on the shelf? It's hard to get used to AGCO paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that being said, if you're still considering AGCO as an investment, you'll find it beneficial to know what risks this stock is facing. Case in point: We've spotted 2 warning signs for AGCO you should be aware of.

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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.