Is It Worth Considering Gear Energy Ltd. (TSE:GXE) For Its Upcoming Dividend?
Gear Energy Ltd. (TSE:GXE) stock is about to trade ex-dividend in 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Gear Energy's shares on or after the 14th of December will not receive the dividend, which will be paid on the 29th of December.
The company's next dividend payment will be CA$0.005 per share, and in the last 12 months, the company paid a total of CA$0.06 per share. Based on the last year's worth of payments, Gear Energy has a trailing yield of 9.0% on the current stock price of CA$0.67. 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 check whether the dividend payments are covered, and if earnings are growing.
See our latest analysis for Gear Energy
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. Gear Energy paid out 66% of its earnings to investors last year, a normal payout level for most businesses. 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 paid out an unsustainably high 364% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.
Gear Energy paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Gear Energy to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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. It's encouraging to see Gear Energy has grown its earnings rapidly, up 26% a year for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last two years, Gear Energy has lifted its dividend by approximately 22% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
The Bottom Line
Is Gear Energy worth buying for its dividend? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Gear Energy paid out a much higher percentage of its free cash flow, which makes us uncomfortable. All things considered, we are not particularly enthused about Gear Energy from a dividend perspective.
So if you want to do more digging on Gear Energy, you'll find it worthwhile knowing the risks that this stock faces. Case in point: We've spotted 3 warning signs for Gear Energy you should be aware of.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
