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Should Income Investors Look At Canadian Tire Corporation, Limited (TSE:CTC.A) Before Its Ex-Dividend?

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Canadian Tire Corporation, Limited (TSE:CTC.A) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 30th of July will not receive the dividend, which will be paid on the 1st of September.

Canadian Tire's next dividend payment will be CA$1.04 per share. Last year, in total, the company distributed CA$4.15 to shareholders. Based on the last year's worth of payments, Canadian Tire has a trailing yield of 2.9% on the current stock price of CA$145.42. 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! So we need to investigate whether Canadian Tire can afford its dividend, and if the dividend could grow.

View our latest analysis for Canadian Tire

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. That's why it's good to see Canadian Tire paying out a modest 36% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year, it paid out dividends equivalent to 336% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since Canadian Tire is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

While Canadian Tire's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Canadian Tire to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

TSX:CTC.A Historical Dividend Yield, July 25th 2019

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. This is why it's a relief to see Canadian Tire earnings per share are up 9.0% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Canadian Tire has delivered 17% dividend growth per year on average over the past 10 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Should investors buy Canadian Tire for the upcoming dividend? Canadian Tire delivered reasonable earnings per share growth in recent times, and paid out less than half its profits and 336% of its cash flow over the last year, which is a mediocre outcome. Overall, it's hard to get excited about Canadian Tire from a dividend perspective.

Ever wonder what the future holds for Canadian Tire? See what the nine analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

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.

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. Thank you for reading.