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Is It Smart To Buy Cogeco Communications Inc. (TSE:CCA) Before It Goes Ex-Dividend?

Simply Wall St

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 Cogeco Communications Inc. (TSE:CCA) is about to go ex-dividend in just 3 days. You can purchase shares before the 27th of January in order to receive the dividend, which the company will pay on the 11th of February.

Cogeco Communications's upcoming dividend is CA$0.58 a share, following on from the last 12 months, when the company distributed a total of CA$2.32 per share to shareholders. Based on the last year's worth of payments, Cogeco Communications stock has a trailing yield of around 2.2% on the current share price of CA$105.82. If you buy this business for its dividend, you should have an idea of whether Cogeco Communications's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Cogeco Communications

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Cogeco Communications's payout ratio is modest, at just 30% of profit. A useful secondary check can be to evaluate whether Cogeco Communications generated enough free cash flow to afford its dividend. The good news is it paid out just 21% of its free cash flow in the last year.

It's positive to see that Cogeco Communications's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

TSX:CCA Historical Dividend Yield, January 23rd 2020

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Fortunately for readers, Cogeco Communications's earnings per share have been growing at 11% a year for the past five years. The company has managed to grow earnings at a rapid rate, while reinvesting most of the profits within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

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, Cogeco Communications has lifted its dividend by approximately 17% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

Should investors buy Cogeco Communications for the upcoming dividend? Cogeco Communications has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. Overall we think this is an attractive combination and worthy of further research.

Ever wonder what the future holds for Cogeco Communications? See what the ten analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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 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.