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In the 1970s hit “Copacabana,” Barry Manilow famously sang, “At the Copa, they fell in love.”

And it’s no surprise that dividend investors have fallen in love with Copa Holdings‘ (CPA) nearly 6% yield.

But will investors live happily ever after with Copa’s dividend, or will they have their hearts broken?

Copa Holdings owns two airlines, one based in Panama and the other in Colombia. The company has been in operation since 1947.

It currently pays a $1.61 quarterly dividend, which equals a 5.9% yield.

Copa’s cash flow has experienced turbulence, having bounced around over the past several years. Remarkably, this year, the airline company’s free cash flow is forecast to be below where it was in 2021, when air travel was heavily affected by the pandemic.

Safety Net does not like to see falling cash flow.

Last year, Copa paid out $269 million in dividends against $371 million in free cash flow for a payout ratio of 73%, just within my comfort zone of 75% or lower. This year, however, with free cash flow projected to plummet to $114 million, the $295 million expected in dividends will launch the payout ratio to an atmospheric 259%, which is not sustainable.

Copa has also slashed its dividend three times in the past 10 years. In 2016, the quarterly dividend fell from $0.84 per share to $0.51, and in 2019, it dropped from $0.87 to $0.65. In 2020, the dividend was completely eliminated for the last three quarters of the year.

Management has proven that they have no problem cutting the dividend when they feel it’s necessary. Given this year’s expected drop in free cash flow, it is necessary, unless the company were to dip into its $1.3 billion in cash or take on debt to pay the dividend.

But since management has shown us that the dividend is about as sacred as packs of peanuts on a plane, I expect the dividend to be cut in the near term.

Dividend Safety Rating: F

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