Does Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA) Have A Place In Your Dividend Portfolio?

Today we'll take a closer look at Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA) 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.

A slim 1.9% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Industrias Bachoco. de could have potential. Some simple research can reduce the risk of buying Industrias Bachoco. de for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Industrias Bachoco. de!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. 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, Industrias Bachoco. de paid out 25% of its profit as dividends. We'd say its dividends are thoroughly covered by earnings.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Of the free cash flow it generated last year, Industrias Bachoco. de paid out 28% as dividends, suggesting the dividend is affordable. It's positive to see that Industrias Bachoco. de's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

We update our data on Industrias Bachoco. 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. For the purpose of this article, we only scrutinise the last decade of Industrias Bachoco. de's dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was Mex$5.0 in 2010, compared to Mex$15.8 last year. This works out to be a compound annual growth rate (CAGR) of approximately 12% a year over that time. The dividends haven't grown at precisely 12% every year, but this is a useful way to average out the historical rate of growth.

Industrias Bachoco. de has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's not great to see that Industrias Bachoco. de's have fallen at approximately 4.2% over the past five years. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

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. It's great to see that Industrias Bachoco. de is paying out a low percentage of its earnings and cash flow. Earnings per share are down, and Industrias Bachoco. de's dividend has been cut at least once in the past, which is disappointing. In sum, we find it hard to get excited about Industrias Bachoco. de from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 1 warning sign for Industrias Bachoco. de that investors should take into consideration.

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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