Don’t buy Ebro Foods, SA (BME: EBRO) for its next dividend without doing these checks

It looks like Ebro Foods, SA (BME: EBRO) is about to be ex-dividend within the next 4 days. The ex-dividend date is generally set at one working day before the registration date which is the deadline by which you must be present in the books of the company as a shareholder to receive the dividend. The ex-dividend date is important because every time a stock is bought or sold, the transaction takes at least two business days to settle. This means that investors who buy Ebro Foods shares from December 20 will not receive the dividend, which will be paid on December 22.

The company’s future dividend is € 0.46 per share, following the last 12 months, when the company has distributed a total of € 0.57 per share to shareholders. Looking at the last 12 months of distributions, Ebro Foods has a rolling return of around 3.3% on its current price of € 17.06. Dividends are a major contributor to returns on investment for long-term holders, but only if the dividend continues to be paid. It is therefore necessary to check whether dividend payments are covered and whether profits are growing.

Check out our latest review for Ebro Foods

Dividends are usually paid out of business income, so if a business pays more than it earned, its dividend is usually at risk of being reduced. Ebro Foods paid out over half (70%) of its profits last year, which is a steady payout ratio for most companies. A useful secondary check may be to assess whether Ebro Foods has generated enough free cash flow to pay its dividend. Over the past year, it paid dividends equivalent to 248% of what it generated in free cash flow, an unusually high percentage. Our definition of free cash flow excludes cash generated from the sale of assets, so given that Ebro Foods pays such a high percentage of its cash flow, it might be interesting to see if it has sold any assets or has experienced similar events which could have led to such a Payment dividend.

While Ebro Foods’ dividends were covered by the company’s reported profits, the cash flow is a bit more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividends. . Money is king, as they say, and if Ebro Foods were to repeatedly pay dividends that are not well covered by cash flow, we would take this as a warning sign.

Click here to view the company’s payout ratio, as well as analysts’ estimates of its future dividends.

BME: EBRO Historical Dividend December 15, 2021

Have profits and dividends increased?

Companies that don’t increase their profits can still be valuable, but it’s even more important to assess the sustainability of the dividend if it looks like the business will be struggling to grow. If business goes into recession and the dividend is reduced, the business could experience a sharp drop in value. It is not encouraging that Ebro Foods’ profits have actually been stable over the past five years. It’s better than seeing them go down, of course, but over the long term, all the best dividend-paying stocks are capable of significantly increasing their earnings per share.

Many investors will assess a company’s dividend performance by evaluating how much dividend payments have changed over time. Over the past 10 years, Ebro Foods has increased its dividend to around 3.2% per year on average.

The bottom line

Should investors buy Ebro Foods for the next dividend? It’s not great to see that earnings per share are stable and that the company has paid an uncomfortably high percentage of its cash flow over the past year. Cash flow is generally more volatile than earnings, but that’s still not what we like to see. It’s not the most attractive proposition from a dividend standpoint, and we would probably drop this one for now.

However, if you are still interested in Ebro Foods and want to learn more, it will be very helpful for you to know the risks that this stock faces. For example, we found 2 warning signs for Ebro Foods which we recommend that you consider before investing in the business.

A common investment mistake is to buy the first interesting stock you see. Here you will find a list of promising dividend paying stocks with a yield above 2% and an upcoming dividend.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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