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Dividend Investors: Don't Be Too Quick To Buy The North West Company Inc. (TSE:NWC) For Its Upcoming Dividend

Simply Wall St

Readers hoping to buy The North West Company Inc. (TSE:NWC) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 27th of September to receive the dividend, which will be paid on the 15th of October.

North West's upcoming dividend is CA$0.3 a share, following on from the last 12 months, when the company distributed a total of CA$1.3 per share to shareholders. Looking at the last 12 months of distributions, North West has a trailing yield of approximately 4.7% on its current stock price of CA$28.28. 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! So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for North West

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. North West is paying out an acceptable 68% of its profit, a common payout level among most companies. 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. It paid out an unsustainably high 206% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since North West is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

North West paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were North West to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

TSX:NWC Historical Dividend Yield, September 23rd 2019

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see North West earnings per share are up 7.7% 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. North West's dividend payments are broadly unchanged compared to where they were ten years ago.

Final Takeaway

From a dividend perspective, should investors buy or avoid North West? Earnings per share have grown somewhat, although North West paid out over half its profits and the dividend was not well covered by free cash flow. Bottom line: North West has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Ever wonder what the future holds for North West? See what the five 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.