It Might Not Be A Great Idea To Buy Whitecap Resources Inc. (TSE:WCP) For Its Next Dividend
Whitecap Resources Inc. (TSE:WCP) is about to trade ex-dividend in the next two days. Investors can purchase shares before the 29th of October in order to be eligible for this dividend, which will be paid on the 16th of November.
Whitecap Resources's next dividend payment will be CA$0.014 per share, on the back of last year when the company paid a total of CA$0.17 to shareholders. Based on the last year's worth of payments, Whitecap Resources has a trailing yield of 6.5% on the current stock price of CA$2.65. 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! As a result, readers should always check whether Whitecap Resources has been able to grow its dividends, or if the dividend might be cut.
Check out our latest analysis for Whitecap Resources
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Whitecap Resources reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. The company paid out 107% 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.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Whitecap Resources reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Whitecap Resources has seen its dividend decline 15% per annum on average over the past eight years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.
Get our latest analysis on Whitecap Resources's balance sheet health here.
Final Takeaway
Is Whitecap Resources worth buying for its dividend? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. It's not that we think Whitecap Resources is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Whitecap Resources. Our analysis shows 2 warning signs for Whitecap Resources that we strongly recommend you have a look at before investing in the company.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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. 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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