It looks like Canadian Pacific Railway Limited (TSE:CP) is about to go ex-dividend in the next four days. You can purchase shares before the 24th of September in order to receive the dividend, which the company will pay on the 26th of October.
Canadian Pacific Railway's upcoming dividend is CA$0.95 a share, following on from the last 12 months, when the company distributed a total of CA$3.80 per share to shareholders. Last year's total dividend payments show that Canadian Pacific Railway has a trailing yield of 1.0% on the current share price of CA$396.96. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Canadian Pacific Railway has been able to grow its dividends, or if the dividend might be cut.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Canadian Pacific Railway is paying out just 20% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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 34% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that Canadian Pacific Railway'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.
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. Fortunately for readers, Canadian Pacific Railway's earnings per share have been growing at 15% a year for the past five years. Earnings per share have been growing rapidly and the company is retaining a majority of its earnings within the business. This will make it easier to fund future growth efforts and we think this is an attractive combination - plus the dividend can always be increased later.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Canadian Pacific Railway has delivered an average of 14% per year annual increase in its dividend, based on the past 10 years of dividend payments. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
To Sum It Up
Is Canadian Pacific Railway worth buying for its dividend? We love that Canadian Pacific Railway is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. Canadian Pacific Railway looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
On that note, you'll want to research what risks Canadian Pacific Railway is facing. Our analysis shows 1 warning sign for Canadian Pacific Railway and you should be aware of it before buying any shares.
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.
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