Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Secure Energy Services Inc. (TSE:SES) is about to trade ex-dividend in the next 4 days. 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.
Secure Energy Services's next dividend payment will be CA$0.022 per share, and in the last 12 months, the company paid a total of CA$0.27 per share. Based on the last year's worth of payments, Secure Energy Services has a trailing yield of 5.9% on the current stock price of CA$4.61. If you buy this business for its dividend, you should have an idea of whether Secure Energy Services's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Secure Energy Services paid out a disturbingly high 335% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. 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 paid out more than half (54%) of its free cash flow in the past year, which is within an average range for most companies.
It's good to see that while Secure Energy Services'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. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Secure Energy Services's earnings per share have dropped 26% 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. Secure Energy Services has delivered an average of 8.8% per year annual increase in its dividend, based on the past seven years of dividend payments. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Secure Energy Services is already paying out 335% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
Has Secure Energy Services got what it takes to maintain its dividend payments? Earnings per share have been shrinking in recent times. What's more, Secure Energy Services 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. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Wondering what the future holds for Secure Energy Services? See what the eight analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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