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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 Enerflex Ltd. (TSE:EFX) is about to go ex-dividend in just three days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase Enerflex's shares before the 19th of May in order to be eligible for the dividend, which will be paid on the 8th of July.
The company's upcoming dividend is CA$0.02 a share, following on from the last 12 months, when the company distributed a total of CA$0.08 per share to shareholders. Last year's total dividend payments show that Enerflex has a trailing yield of 1.0% on the current share price of CA$7.84. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's 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. Enerflex has a low and conservative payout ratio of just 13% of its income after tax. 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. Luckily it paid out just 8.2% of its free cash flow last year.
It's positive to see that Enerflex'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.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that Enerflex's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. Growth has been anaemic. Yet with more than 75% of its earnings being kept in the business, there is ample room to reinvest in growth or lift the payout ratio - either of which could increase the dividend.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Enerflex has seen its dividend decline 10% per annum on average over the past 10 years, which is not great to see.
The Bottom Line
Should investors buy Enerflex for the upcoming dividend? Earnings per share have been flat over this time, but we're intrigued to see that Enerflex is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine strong earnings per share growth with a low payout ratio, and Enerflex is halfway there. Overall we think this is an attractive combination and worthy of further research.
So while Enerflex looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Our analysis shows 1 warning sign for Enerflex and you should be aware of this before buying any shares.
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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