Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Computer Modelling Group Ltd. (TSE:CMG) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 4th of September, you won't be eligible to receive this dividend, when it is paid on the 13th of September.
Computer Modelling Group's next dividend payment will be CA$0.10 per share. Last year, in total, the company distributed CA$0.40 to shareholders. Looking at the last 12 months of distributions, Computer Modelling Group has a trailing yield of approximately 6.0% on its current stock price of CA$6.68. If you buy this business for its dividend, you should have an idea of whether Computer Modelling Group's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Computer Modelling Group distributed an unsustainably high 133% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Computer Modelling Group generated enough free cash flow to afford its dividend. Over the past year it paid out 139% of its free cash flow as dividends, which is uncomfortably 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.
As Computer Modelling Group's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. So we're not too excited that Computer Modelling Group's earnings are down 3.3% a year over the past five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Computer Modelling Group has increased its dividend at approximately 8.9% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Computer Modelling Group is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
To Sum It Up
Should investors buy Computer Modelling Group for the upcoming dividend? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (133%) and cash flow (139%) as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It's not that we think Computer Modelling Group is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Ever wonder what the future holds for Computer Modelling Group? See what the six 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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.