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Why It Might Not Make Sense To Buy Bonterra Energy Corp. (TSE:BNE) For Its Upcoming Dividend

Simply Wall St

Bonterra Energy Corp. (TSE:BNE) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 14th of August will not receive this dividend, which will be paid on the 30th of August.

Bonterra Energy's upcoming dividend is CA$0.01 a share, following on from the last 12 months, when the company distributed a total of CA$0.12 per share to shareholders. Looking at the last 12 months of distributions, Bonterra Energy has a trailing yield of approximately 2.8% on its current stock price of CA$4.35. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Bonterra Energy has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Bonterra Energy

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Bonterra Energy distributed an unsustainably high 175% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. The company paid out 90% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

As Bonterra Energy'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:BNE Historical Dividend Yield, August 10th 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Bonterra Energy's earnings per share have dropped 22% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Bonterra Energy has seen its dividend decline 29% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

From a dividend perspective, should investors buy or avoid Bonterra Energy? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (175%) and cash flow (90%) as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Curious what other investors think of Bonterra Energy? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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.

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. Thank you for reading.