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Don't Buy Tidewater Midstream and Infrastructure Ltd. (TSE:TWM) For Its Next Dividend Without Doing These Checks

Readers hoping to buy Tidewater Midstream and Infrastructure Ltd. (TSE:TWM) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase Tidewater Midstream and Infrastructure's shares before the 29th of June to receive the dividend, which will be paid on the 30th of July.

The company's upcoming dividend is CA$0.01 a share, following on from the last 12 months, when the company distributed a total of CA$0.04 per share to shareholders. Looking at the last 12 months of distributions, Tidewater Midstream and Infrastructure has a trailing yield of approximately 2.8% on its current stock price of CA$1.44. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Tidewater Midstream and Infrastructure

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Tidewater Midstream and Infrastructure paid out 106% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. It paid out 8.5% of its free cash flow as dividends last year, which is conservatively low.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Tidewater Midstream and Infrastructure fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

historic-dividend
historic-dividend

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 Tidewater Midstream and Infrastructure's earnings per share have dropped 19% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Tidewater Midstream and Infrastructure's dividend payments are effectively flat on where they were six years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

Final Takeaway

Should investors buy Tidewater Midstream and Infrastructure for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 106% 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. It's not that we think Tidewater Midstream and Infrastructure is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Tidewater Midstream and Infrastructure and want to know more, you'll find it very useful to know what risks this stock faces. For instance, we've identified 4 warning signs for Tidewater Midstream and Infrastructure (1 is concerning) you should be aware of.

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.

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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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