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Transcontinental Inc. (TSE:TCL.A) Pays A CA$0.23 Dividend In Just 4 Days

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Transcontinental Inc. (TSE:TCL.A) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 20th of March will not receive this dividend, which will be paid on the 7th of April.

Transcontinental's next dividend payment will be CA$0.23 per share, on the back of last year when the company paid a total of CA$0.90 to shareholders. Last year's total dividend payments show that Transcontinental has a trailing yield of 6.3% on the current share price of CA$14.32. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Transcontinental can afford its dividend, and if the dividend could grow.

View our latest analysis for Transcontinental

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. Transcontinental paid out more than half (53%) of its earnings last year, which is a regular payout ratio for most companies. 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. It distributed 25% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that Transcontinental'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:TCL.A Historical Dividend Yield, March 15th 2020
TSX:TCL.A Historical Dividend Yield, March 15th 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 earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Transcontinental, with earnings per share up 4.5% on average over the last five years. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, Transcontinental has increased its dividend at approximately 11% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

Has Transcontinental got what it takes to maintain its dividend payments? Earnings per share growth has been modest and Transcontinental paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. To summarise, Transcontinental looks okay on this analysis, although it doesn't appear a stand-out opportunity.

On that note, you'll want to research what risks Transcontinental is facing. Our analysis shows 2 warning signs for Transcontinental and you should be aware of these before buying any shares.

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.