Why Gerdau's Dividend Is on the Brink: Risks and Lessons for Investors

Investors often chase high dividend yields, but too often they ignore the red flags lurking beneath the surface. Gerdau S.A. (GGB), a Brazilian steel producer, is now a prime example of a “False Dividend Stock”—a company whose payouts appear sustainable on paper but are built on shaky foundations. With declining earnings, weakening free cash flow, and a debt burden that's far from manageable, GGB's dividend is primed for a cut. This article unpacks why the writing is on the wall—and why investors should rethink their exposure to similar traps.

GGB's Dividend: A Fragile Illusion

GGB's dividend yield has lured income investors, but its sustainability is now in doubt. Let's break down the math:

1. Payout Ratio Volatility:
   GGB's dividend payout ratio (dividends / net income) has swung wildly over the past decade, hitting a high of 278% in 2012 before plummeting to just 19% in 2024. While the current trailing ratio of 27.6% appears safe, this masks deeper issues. The dividend per share has collapsed—from $0.055 in May 2024 to a mere $0.02 in March 2025—despite the payout ratio staying low. This suggests earnings are shrinking faster than dividends, forcing management to slash payouts to survive.

2. Earnings Under Pressure:
   GGB's revenue grew by 5.7% in 2024, but adjusted EBITDA expanded by only 62% year-over-year due to rising costs. The company's backlog of $2.3 billion (up 20% YoY) offers some hope, but profit margins remain squeezed. Analysts project only 16.5% annual earnings growth through 2027—a far cry from the double-digit declines in dividend amounts.

3. Free Cash Flow Declines:
   GGB's free cash flow (FCF) has been in free fall. While still positive, FCF dropped to $1.08 billion in 2023 (down 11% from 2022) and is projected to slip further to $1.08 billion in 2025. This trend is unsustainable. A dividend cut becomes inevitable if FCF continues to shrink while debt remains elevated.

1. Debt Overhang:
   GGB's total debt stands at $2.77 billion, with a debt-to-equity ratio of 1.5—a manageable number but one that's worsened after a June 2025 debt tender. While the tender reduced outstanding notes, it didn't eliminate the risk. A 22% drop in total debt (from 2024 levels) feels less like progress and more like a stopgap in a volatile industry.

Comparisons to High-Risk Peers: B&G Foods and AES Corp

GGB's struggles aren't isolated. Two high-risk peers—B&G Foods (BG) and AES Corp (AES)—share similar red flags, underscoring sector-wide risks:

1. B&G Foods (BG):
   BG's sales have fallen 6% in 2024, with EBITDA down 7%. The company's net loss ($251 million in 2024) and reliance on asset sales to stay afloat highlight its precarious position. BG's dividend? It doesn't have one—investors were left holding a bag of declining sales and no income.

1. AES Corp (AES):
   AES carries $30.3 billion in debt, with an interest coverage ratio of just 1.6x—barely enough to cover interest costs. Despite maintaining a $0.18 quarterly dividend, its payout is propped up by risky leverage. A dividend cut here would trigger a sell-off, and GGB isn't far behind.

The Bottom Line: A Dividend Cut Is Inevitable—Get Ready for Pain

The data is clear: GGB's dividend is on life support. Even if the company avoids a cut in the next quarter, the trends are undeniable. Declining FCF, shrinking dividends per share, and a debt load that dwarfs peers' make this a ticking time bomb. When the cut comes, income investors will flee, and the stock price will crater.

Investment Advice: Avoid “False Dividend Stocks”

• Sell GGB: If you own GGB, exit now. The risk-reward here is skewed toward loss.
• Avoid High-Yield Traps: Focus on companies with stable FCF, low debt, and dividends that grow alongside earnings.
• Prioritize Total Return: Yield alone isn't enough—demand earnings resilience and cash flow strength.

GGB's story is a cautionary tale. Chasing dividends without scrutinizing the underlying health of a company is a recipe for disaster. Investors would be wise to steer clear of “False Dividend Stocks” and demand transparency in financial metrics. The era of easy yield is over—only the strong will survive.

Final Take: GGB's dividend is a house of cards. Investors should treat it as a sell signal and stay vigilant against similar traps in other high-yield names.