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 Consolidated Water Co. Ltd. (NASDAQ:CWCO) is about to go ex-dividend in just 4 days. You will need to purchase shares before the 31st of March to receive the dividend, which will be paid on the 30th of April.
Consolidated Water's next dividend payment will be US$0.085 per share. Last year, in total, the company distributed US$0.34 to shareholders. Looking at the last 12 months of distributions, Consolidated Water has a trailing yield of approximately 2.4% on its current stock price of $14.19. If you buy this business for its dividend, you should have an idea of whether Consolidated Water'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.
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. Consolidated Water paid out more than half (60%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Thankfully its dividend payments took up just 44% of the free cash flow it generated, which is a comfortable payout ratio.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
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. With that in mind, we're encouraged by the steady growth at Consolidated Water, with earnings per share up 6.0% on average over the last five years. Decent historical earnings per share growth suggests Consolidated Water has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, ten years ago, Consolidated Water has lifted its dividend by approximately 2.7% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
The Bottom Line
Should investors buy Consolidated Water for the upcoming dividend? While earnings per share growth has been modest, Consolidated Water's dividend payouts are around an average level; without a sharp change in earnings we feel that the dividend is likely somewhat sustainable. Pleasingly the company paid out a conservatively low percentage of its free cash flow. In summary, it's hard to get excited about Consolidated Water from a dividend perspective.
While it's tempting to invest in Consolidated Water for the dividends alone, you should always be mindful of the risks involved. Every company has risks, and we've spotted 1 warning sign for Consolidated Water you should know about.
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 firstname.lastname@example.org. 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.
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