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Should Income Investors Look At Maple Leaf Foods Inc. (TSE:MFI) Before Its Ex-Dividend?

Simply Wall St

Maple Leaf Foods Inc. (TSE:MFI) stock is about to trade ex-dividend in 4 days time. This means that investors who purchase shares on or after the 5th of September will not receive the dividend, which will be paid on the 30th of September.

Maple Leaf Foods's next dividend payment will be CA$0.14 per share, on the back of last year when the company paid a total of CA$0.58 to shareholders. Based on the last year's worth of payments, Maple Leaf Foods stock has a trailing yield of around 1.8% on the current share price of CA$31.66. If you buy this business for its dividend, you should have an idea of whether Maple Leaf Foods's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Maple Leaf Foods

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Its dividend payout ratio is 83% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth We'd be worried about the risk of a drop in 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. The company paid out 103% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

While Maple Leaf Foods'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 Maple Leaf Foods 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:MFI Historical Dividend Yield, August 31st 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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Maple Leaf Foods's earnings have been skyrocketing, up 52% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Maple Leaf Foods has lifted its dividend by approximately 14% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

Is Maple Leaf Foods worth buying for its dividend? The best dividend stocks typically boast a long history of growing earnings per share (EPS) via a combination of earnings growth and buybacks. So, you might think that Maple Leaf Foods buying back stock, growing its EPS, and retaining profits within its business is a good combination. However, we note with some concern that it paid out 103% of its free cash flow last year, which is uncomfortably high and makes us wonder why the company chose to spend even more cash on buybacks. In summary, it's hard to get excited about Maple Leaf Foods from a dividend perspective.

Curious what other investors think of Maple Leaf Foods? See what analysts 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.