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Here's Why We're Wary Of Buying Entravision Communications Corporation's (NYSE:EVC) For Its Upcoming Dividend

Simply Wall St

It looks like Entravision Communications Corporation (NYSE:EVC) is about to go ex-dividend in the next 4 days. You will need to purchase shares before the 13th of December to receive the dividend, which will be paid on the 31st of December.

Entravision Communications's next dividend payment will be US$0.05 per share. Last year, in total, the company distributed US$0.20 to shareholders. Looking at the last 12 months of distributions, Entravision Communications has a trailing yield of approximately 7.2% on its current stock price of $2.78. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Entravision Communications

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Entravision Communications reported a loss last year, so it's not great to see that it has continued paying a dividend. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If Entravision Communications didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Entravision Communications paid out more free cash flow than it generated - 193%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Click here to see how much of its profit Entravision Communications paid out over the last 12 months.

NYSE:EVC Historical Dividend Yield, December 8th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Entravision Communications 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, seven years ago, Entravision Communications has lifted its dividend by approximately 7.6% a year on average.

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

The Bottom Line

Is Entravision Communications an attractive dividend stock, or better left on the shelf? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. Bottom line: Entravision Communications has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Keen to explore more data on Entravision Communications's financial performance? Check out our visualisation of its historical revenue and earnings growth.

If you're in the market for dividend stocks, we recommend checking our list of top 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.