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Dividend Investors: Don't Be Too Quick To Buy Whitecap Resources Inc. (TSE:WCP) For Its Upcoming Dividend

Simply Wall St

It looks like Whitecap Resources Inc. (TSE:WCP) is about to go ex-dividend in the next 4 days. You can purchase shares before the 29th of August in order to receive the dividend, which the company will pay on the 16th of September.

Whitecap Resources's next dividend payment will be CA$0.029 per share. Last year, in total, the company distributed CA$0.34 to shareholders. Last year's total dividend payments show that Whitecap Resources has a trailing yield of 9.4% on the current share price of CA$3.64. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Whitecap Resources

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. Whitecap Resources paid out 163% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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 distributed 45% of its free cash flow as dividends, a comfortable payout level for most companies.

It's good to see that while Whitecap Resources's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

TSX:WCP Historical Dividend Yield, August 24th 2019

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Whitecap Resources's earnings per share have dropped 5.9% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Whitecap Resources has seen its dividend decline 7.7% per annum on average over the past 7 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Final Takeaway

Is Whitecap Resources an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 163% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Bottom line: Whitecap Resources has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Ever wonder what the future holds for Whitecap Resources? See what the four 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.