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Here's Why We're Wary Of Buying Birchcliff Energy Ltd.'s (TSE:BIR) For Its Upcoming Dividend

Simply Wall St

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Birchcliff Energy Ltd. (TSE:BIR) is about to go ex-dividend in just 4 days. Ex-dividend means that investors that purchase the stock on or after the 13th of March will not receive this dividend, which will be paid on the 31st of March.

Birchcliff Energy's next dividend payment will be CA$0.026 per share. Last year, in total, the company distributed CA$0.10 to shareholders. Based on the last year's worth of payments, Birchcliff Energy has a trailing yield of 7.6% on the current stock price of CA$1.39. 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 Birchcliff Energy has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Birchcliff Energy

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. Last year Birchcliff Energy paid out 91% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. Over the last year, it paid out more than three-quarters (83%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's good to see that while Birchcliff Energy's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

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

TSX:BIR Historical Dividend Yield, March 8th 2020

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Birchcliff Energy's earnings per share have dropped 23% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Birchcliff Energy has delivered an average of 1.6% per year annual increase in its dividend, based on the past three years of dividend payments.

The Bottom Line

Should investors buy Birchcliff Energy for the upcoming dividend? It's never fun to see a company's earnings per share in retreat. What's more, Birchcliff Energy is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Birchcliff Energy. Our analysis shows 5 warning signs for Birchcliff Energy that we strongly recommend you have a look at before investing in the company.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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.