Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Canadian Utilities Limited (TSE:CU) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 6th of November in order to be eligible for this dividend, which will be paid on the 1st of December.
Canadian Utilities's next dividend payment will be CA$0.4 per share, and in the last 12 months, the company paid a total of CA$1.7 per share. Based on the last year's worth of payments, Canadian Utilities has a trailing yield of 4.4% on the current stock price of CA$38.69. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.
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. Fortunately Canadian Utilities's payout ratio is modest, at just 49% of profit. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the past year it paid out 179% 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 Canadian Utilities'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 Canadian Utilities's ability to maintain its dividend.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Canadian Utilities 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.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last ten years, Canadian Utilities has lifted its dividend by approximately 9.1% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
To Sum It Up
Is Canadian Utilities an attractive dividend stock, or better left on the shelf? Canadian Utilities has seen its earnings per share grow steadily and paid out less than half its profit over the last year. Unfortunately, its dividend was not well covered by free cash flow. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Canadian Utilities's dividend merits.
Curious what other investors think of Canadian Utilities? See what analysts 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.