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Don't Buy Ebro Foods, S.A. (BME:EBRO) For Its Next Dividend Without Doing These Checks

Simply Wall St

Ebro Foods, S.A. (BME:EBRO) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 30th of March in order to be eligible for this dividend, which will be paid on the 1st of April.

Ebro Foods's next dividend payment will be €0.15 per share, and in the last 12 months, the company paid a total of €0.57 per share. Based on the last year's worth of payments, Ebro Foods stock has a trailing yield of around 3.3% on the current share price of €17.42. 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 investigate whether Ebro Foods can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Ebro Foods

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. Ebro Foods paid out 70% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Ebro Foods generated enough free cash flow to afford its dividend. It paid out 97% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

Ebro Foods paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Ebro Foods's ability to maintain its dividend.

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

BME:EBRO Historical Dividend Yield March 26th 2020

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's not ideal to see Ebro Foods's earnings per share have been shrinking at 3.3% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Ebro Foods has seen its dividend decline 5.5% per annum on average over the past ten years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

To Sum It Up

Should investors buy Ebro Foods for the upcoming dividend? Ebro Foods had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. Bottom line: Ebro Foods has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

So if you're still interested in Ebro Foods despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Case in point: We've spotted 2 warning signs for Ebro Foods you should be aware of.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.