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Why You Should Leave Computer Modelling Group Ltd. (TSE:CMG)'s Upcoming Dividend On The Shelf

Simply Wall St

Computer Modelling Group Ltd. (TSE:CMG) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 4th of March to receive the dividend, which will be paid on the 13th of March.

Computer Modelling Group's next dividend payment will be CA$0.10 per share. Last year, in total, the company distributed CA$0.40 to shareholders. Looking at the last 12 months of distributions, Computer Modelling Group has a trailing yield of approximately 5.8% on its current stock price of CA$6.88. 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! We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Computer Modelling Group

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Computer Modelling Group distributed an unsustainably high 143% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Computer Modelling Group paid out more free cash flow than it generated - 133%, 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 Computer Modelling Group'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:CMG Historical Dividend Yield, February 28th 2020

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's not ideal to see Computer Modelling Group's earnings per share have been shrinking at 4.8% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Computer Modelling Group has delivered an average of 6.6% per year annual increase in its dividend, based on the past ten years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Computer Modelling Group is already paying out 143% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is Computer Modelling Group an attractive dividend stock, or better left on the shelf? Not only are earnings per share declining, but Computer Modelling Group is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Wondering what the future holds for Computer Modelling Group? See what the seven 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.

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.