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Why It Might Not Make Sense To Buy Prosegur Cash, S.A. (BME:CASH) For Its Upcoming Dividend

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Simply Wall St
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Readers hoping to buy Prosegur Cash, S.A. (BME:CASH) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 23rd of December, you won't be eligible to receive this dividend, when it is paid on the 27th of December.

Prosegur Cash's next dividend payment will be €0.012 per share, and in the last 12 months, the company paid a total of €0.079 per share. Last year's total dividend payments show that Prosegur Cash has a trailing yield of 5.7% on the current share price of €1.388. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Prosegur Cash has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Prosegur Cash

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. Prosegur Cash paid out more than half (74%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Prosegur Cash paid out more free cash flow than it generated - 123%, 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.

While Prosegur Cash's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Prosegur Cash to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

BME:CASH Historical Dividend Yield, December 21st 2019
BME:CASH Historical Dividend Yield, December 21st 2019

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by Prosegur Cash's 17% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past two years, Prosegur Cash has increased its dividend at approximately 4.8% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

Final Takeaway

Is Prosegur Cash worth buying for its dividend? Prosegur Cash had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not that we think Prosegur Cash is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Ever wonder what the future holds for Prosegur Cash? See what the nine analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.