Do not buy Grendene SA (BVMF: GRND3) for its next dividend without doing these checks

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Grendene SA (BVMF: GRND3) is about to trade excluding dividend within the next 2 days. The ex-dividend date occurs one day before the record date, which is the day on which shareholders must be on the books of the company to receive a dividend. The ex-dividend date is important because every time a stock is bought or sold, the transaction takes at least two business days to settle. In other words, investors can buy Grendene shares before August 6 in order to be eligible for the dividend, which will be paid on August 18.

The company’s next dividend payment will be R $ 0.037 per share, compared to last year when the company paid a total of R $ 0.53 to shareholders. Calculating the value of last year’s payouts shows that Grendene has a rolling 4.6% return on the current stock price of R $ 11.69. Dividends are an important source of income for many shareholders, but the health of the business is crucial to sustaining these dividends. That is why we should always check whether dividend payments seem sustainable and whether the business is growing.

See our latest review for Grendene

Dividends are generally paid out of company profits. If a company pays more dividends than it made a profit, then the dividend could be unsustainable. Grendene donated 95% of her profits, which is more than we’re comfortable with, barring extenuating circumstances. Yet cash flow is still more important than earnings in valuing a dividend, so we need to see if the company has generated enough cash to pay for its distribution. Over the past year, it paid dividends equivalent to 224% of what it generated in free cash flow, a surprisingly high percentage. Unless there is something about the business that we don’t capture, it could signal a risk that the dividend may need to be reduced in the future.

Grendene has a large net cash position on the balance sheet, which could fund large dividends for a period of time, if the company so wished. Yet savvy investors know that it is better to weigh dividends against cash and profits generated by the company. Paying cash dividends to the balance sheet is not sustainable in the long term.

Cash is slightly more important than earnings from a dividend perspective, but given that Grendene’s payments were not well covered by earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see how much of her profits Grendene has paid in the past 12 months.

BOVESPA: GRND3 Historical Dividend August 3, 2021

Have profits and dividends increased?

Stocks with stable earnings can still be attractive dividend payers, but it’s important to be more careful in your approach and demand a greater margin of safety when it comes to dividend sustainability. If profits fall enough, the company could be forced to cut its dividend. It is not encouraging that Grendene’s earnings have indeed been stable over the past five years. We would take that on a drop in earnings any day, but in the long run, the best dividend-paying stocks increase all their earnings per share.

Most investors primarily assess a company’s dividend prospects by checking the historical rate of dividend growth. Grendene has experienced dividend growth of 15% per year on average over the past 10 years.

To summarize

Is Grendene worth buying for its dividend? It hasn’t been able to generate earnings growth, but pays an uncomfortably high percentage of its earnings (95%) and cash flow (224%) as dividends. It’s not that we think Grendene is a bad company, but these characteristics don’t usually lead to outstanding dividend performance.

That said, if you look at this stock without worrying too much about the dividend, you should still be familiar with the risks associated with Grendene. For example, Grendene has 3 warning signs (and 1 that can’t be ignored) we think you should be aware of.

A common investment mistake is to buy the first interesting stock you see. Here you will find a list of promising dividend paying stocks with a yield above 2% and an upcoming dividend.

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