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Don't Buy Cardinal Energy Ltd. (TSE:CJ) For Its Next Dividend Without Doing These Checks

Simply Wall St

Readers hoping to buy Cardinal Energy Ltd. (TSE:CJ) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 30th of January, you won't be eligible to receive this dividend, when it is paid on the 18th of February.

Cardinal Energy's upcoming dividend is CA$0.015 a share, following on from the last 12 months, when the company distributed a total of CA$0.18 per share to shareholders. Based on the last year's worth of payments, Cardinal Energy has a trailing yield of 7.1% on the current stock price of CA$2.53. 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! As a result, readers should always check whether Cardinal Energy has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Cardinal Energy

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Fortunately Cardinal Energy's payout ratio is modest, at just 33% of profit. 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 49% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that Cardinal Energy's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

TSX:CJ Historical Dividend Yield, January 25th 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Cardinal Energy's 28% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Cardinal Energy's dividend payments per share have declined at 19% per year on average over the past six years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

The Bottom Line

Is Cardinal Energy an attractive dividend stock, or better left on the shelf? Cardinal Energy has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. In summary, while it has some positive characteristics, we're not inclined to race out and buy Cardinal Energy today.

Curious what other investors think of Cardinal Energy? See what analysts 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.

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.

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. Thank you for reading.