Red Eléctrica Corporación, S.A. (BME:REE) stock is about to trade ex-dividend in 3 days time. Ex-dividend means that investors that purchase the stock on or after the 3rd of January will not receive this dividend, which will be paid on the 7th of January.
Red Eléctrica Corporación's next dividend payment will be €0.22 per share, on the back of last year when the company paid a total of €0.98 to shareholders. Calculating the last year's worth of payments shows that Red Eléctrica Corporación has a trailing yield of 5.4% on the current share price of €18.175. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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. Red Eléctrica Corporación is paying out an acceptable 74% of its profit, a common payout level among most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Red Eléctrica Corporación paid out more free cash flow than it generated - 153%, 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 Red Eléctrica Corporación'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. Were this to happen repeatedly, this would be a risk to Red Eléctrica Corporación's ability to maintain its dividend.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Red Eléctrica Corporación, with earnings per share up 6.1% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Red Eléctrica Corporación has delivered an average of 12% per year annual increase in its dividend, based on the past ten years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
The Bottom Line
From a dividend perspective, should investors buy or avoid Red Eléctrica Corporación? Red Eléctrica Corporación is paying out a reasonable percentage of its income and an uncomfortably high 153% of its cash flow as dividends. At least earnings per share have been growing steadily. Bottom line: Red Eléctrica Corporación has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Wondering what the future holds for Red Eléctrica Corporación? See what the 13 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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