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It Might Not Be A Great Idea To Buy Savaria Corporation (TSE:SIS) For Its Next Dividend

Simply Wall St

Savaria Corporation (TSE:SIS) stock is about to trade ex-dividend in 2 days time. You can purchase shares before the 30th of July in order to receive the dividend, which the company will pay on the 14th of August.

Savaria's next dividend payment will be CA$0.035 per share, on the back of last year when the company paid a total of CA$0.42 to shareholders. Based on the last year's worth of payments, Savaria stock has a trailing yield of around 3.4% on the current share price of CA$12.47. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Savaria

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year, Savaria paid out 97% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. Savaria paid out more free cash flow than it generated - 164%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

As Savaria's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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

TSX:SIS Historical Dividend Yield, July 27th 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 fall far enough, the company could be forced to cut its dividend. Fortunately for readers, Savaria's earnings per share have been growing at 12% a year for the past five years. We're a bit put out by the fact that Savaria paid out virtually all of its earnings and cashflow as dividends over the last year. Earnings are growing at a decent clip, so this payout ratio may prove sustainable, but it's not great to see.

Savaria also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Savaria has increased its dividend at approximately 35% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

To Sum It Up

From a dividend perspective, should investors buy or avoid Savaria? While it's nice to see earnings per share growing, we're curious about how Savaria intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. Bottom line: Savaria has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Ever wonder what the future holds for Savaria? See what the five 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.