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It Might Not Be A Great Idea To Buy Waterloo Brewing Ltd. (TSE:WBR) For Its Next Dividend

Simply Wall St

Waterloo Brewing Ltd. (TSE:WBR) stock is about to trade ex-dividend in 3 days time. You will need to purchase shares before the 14th of May to receive the dividend, which will be paid on the 29th of May.

Waterloo Brewing's next dividend payment will be CA$0.026 per share, on the back of last year when the company paid a total of CA$0.10 to shareholders. Last year's total dividend payments show that Waterloo Brewing has a trailing yield of 3.6% on the current share price of CA$2.92. If you buy this business for its dividend, you should have an idea of whether Waterloo Brewing'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 Waterloo Brewing

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. An unusually high payout ratio of 355% of its profit suggests something is happening other than the usual distribution of profits to shareholders. 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. Over the last year, it paid out dividends equivalent to 295% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Waterloo Brewing intends to continue funding this dividend, or if it could be forced to the payment.

As Waterloo Brewing'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:WBR Historical Dividend Yield May 10th 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Waterloo Brewing's earnings per share have fallen at approximately 19% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last four years, Waterloo Brewing has lifted its dividend by approximately 22% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Waterloo Brewing is already paying out 355% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

From a dividend perspective, should investors buy or avoid Waterloo Brewing? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (355%) and cash flow as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Waterloo Brewing.

With that in mind though, if the poor dividend characteristics of Waterloo Brewing don't faze you, it's worth being mindful of the risks involved with this business. For example, Waterloo Brewing has 6 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.

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.

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. Thank you for reading.