Readers hoping to buy Stella-Jones Inc. (TSE:SJ) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Ex-dividend means that investors that purchase the stock on or after the 29th of August will not receive this dividend, which will be paid on the 20th of September.
Stella-Jones's next dividend payment will be CA$0.14 per share, on the back of last year when the company paid a total of CA$0.56 to shareholders. Looking at the last 12 months of distributions, Stella-Jones has a trailing yield of approximately 1.5% on its current stock price of CA$38.39. If you buy this business for its dividend, you should have an idea of whether Stella-Jones's dividend is reliable and sustainable. As a result, readers should always check whether Stella-Jones has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Stella-Jones has a low and conservative payout ratio of just 24% of its income after tax. 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. Over the past year it paid out 196% 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.
While Stella-Jones's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Stella-Jones's ability to maintain its dividend.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Stella-Jones earnings per share are up 9.7% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Stella-Jones has delivered 20% dividend growth per year on average over the past 10 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Is Stella-Jones worth buying for its dividend? Stella-Jones delivered reasonable earnings per share growth in recent times, and paid out less than half its profits and 196% of its cash flow over the last year, which is a mediocre outcome. Overall, it's hard to get excited about Stella-Jones from a dividend perspective.
Ever wonder what the future holds for Stella-Jones? See what the eight analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you're in the market for dividend stocks, we recommend checking our list of top 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 email@example.com. 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.