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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 Canadian National Railway Company (TSE:CNR) is about to go ex-dividend in just 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Canadian National Railway's shares on or after the 7th of September, you won't be eligible to receive the dividend, when it is paid on the 29th of September.
The company's next dividend payment will be CA$0.61 per share. Last year, in total, the company distributed CA$2.46 to shareholders. Calculating the last year's worth of payments shows that Canadian National Railway has a trailing yield of 1.6% on the current share price of CA$154. If you buy this business for its dividend, you should have an idea of whether Canadian National Railway's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Canadian National Railway paid out a comfortable 42% of its profit last year. 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. Dividends consumed 57% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's positive to see that Canadian National 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?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Canadian National Railway earnings per share are up 5.0% per annum over the last five years. Decent historical earnings per share growth suggests Canadian National Railway has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Canadian National Railway has delivered 16% dividend growth per year on average over the past 10 years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
Has Canadian National Railway got what it takes to maintain its dividend payments? Earnings per share have been growing at a steady rate, and Canadian National Railway paid out less than half its profits and more than half its free cash flow as dividends over the last year. In summary, it's hard to get excited about Canadian National Railway from a dividend perspective.
In light of that, while Canadian National Railway has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 1 warning sign for Canadian National Railway and you should be aware of this before buying any shares.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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