Readers hoping to buy Alamos Gold Inc. (TSE:AGI) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 4th of December to receive the dividend, which will be paid on the 21st of December.
Alamos Gold's upcoming dividend is US$0.02 a share, following on from the last 12 months, when the company distributed a total of US$0.08 per share to shareholders. Calculating the last year's worth of payments shows that Alamos Gold has a trailing yield of 1.0% on the current share price of CA$10.71. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. 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. Alamos Gold has a low and conservative payout ratio of just 20% of its income after tax. A useful secondary check can be to evaluate whether Alamos Gold generated enough free cash flow to afford its dividend. Alamos Gold paid out more free cash flow than it generated - 142%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
While Alamos Gold'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 Alamos Gold to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
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. It's encouraging to see Alamos Gold has grown its earnings rapidly, up 88% a year 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.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Alamos Gold has delivered an average of 32% per year annual increase in its dividend, based on the past five years of dividend payments. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
The Bottom Line
Has Alamos Gold got what it takes to maintain its dividend payments? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. To summarise, Alamos Gold looks okay on this analysis, although it doesn't appear a stand-out opportunity.
On that note, you'll want to research what risks Alamos Gold is facing. Every company has risks, and we've spotted 1 warning sign for Alamos Gold 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.
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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