Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Inversiones Unespa S.A. (SNSE:UNESPA) is about to go ex-dividend in just 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company’s books to be eligible for a dividend payment. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Meaning, you will need to purchase Inversiones Unespa’s shares before the 13th of January to receive the dividend, which will be paid on the 16th of January.

The company’s next dividend payment will be CL$5.00 per share. Last year, in total, the company distributed CL$36.89 to shareholders. Looking at the last 12 months of distributions, Inversiones Unespa has a trailing yield of approximately 9.6% on its current stock price of CL$386.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it’s growing.

Check out our latest analysis for Inversiones Unespa

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Its dividend payout ratio is 81% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We’d be concerned if earnings began to decline. 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. The company paid out 102% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings – expenses don’t pay themselves – so it’s not great to see it paying out so much of its cash flow.

Inversiones Unespa paid out less in dividends than it reported in profits, but unfortunately it didn’t generate enough cash to cover the dividend. Cash is king, as they say, and were Inversiones Unespa to repeatedly pay dividends that aren’t well covered by cashflow, we would consider this a warning sign.

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we’re glad to see Inversiones Unespa’s earnings per share have risen 12% per annum over the last five years. Earnings have been growing at a decent rate, but we’re concerned dividend payments consumed most of the company’s cash flow over the past year.

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, 10 years ago, Inversiones Unespa has lifted its dividend by approximately 3.0% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Inversiones Unespa is keeping back more of its profits to grow the business.

To Sum It Up

Is Inversiones Unespa worth buying for its dividend? Earnings per share growth is a positive, and the company’s payout ratio looks normal. However, we note Inversiones Unespa paid out a much higher percentage of its free cash flow, which makes us uncomfortable. Overall, it’s hard to get excited about Inversiones Unespa from a dividend perspective.

If you’re not too concerned about Inversiones Unespa’s ability to pay dividends, you should still be mindful of some of the other risks that this business faces. For example, Inversiones Unespa has 3 warning signs (and 2 which are a bit concerning) we think you should know about.

If you’re in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.