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Readers hoping to buy Nutrien Ltd. ( TSE:NTR ) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 29th of September to receive the dividend, which will be paid on the 16th of October.
Nutrien's next dividend payment will be US$0.45 per share, and in the last 12 months, the company paid a total of US$1.80 per share. Based on the last year's worth of payments, Nutrien has a trailing yield of 4.5% on the current stock price of CA$53.13. 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 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. Nutrien paid out 125% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It distributed 43% of its free cash flow as dividends, a comfortable payout level for most companies.
It's good to see that while Nutrien's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. So we're not too excited that Nutrien's earnings are down 4.7% a year over the past five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Nutrien has delivered 4.0% dividend growth per year on average over the past three years. 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. Nutrien is already paying out 125% 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 Nutrien worth buying for its dividend? It's never great to see earnings per share declining, especially when a company is paying out 125% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Nutrien's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think Nutrien is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Although, if you're still interested in Nutrien and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 2 warning signs with Nutrien and understanding them should be part of your investment process.
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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