Readers hoping to buy Seaspan Corporation (NYSE:SSW) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 18th of October in order to be eligible for this dividend, which will be paid on the 30th of October.
Seaspan's upcoming dividend is US$0.1 a share, following on from the last 12 months, when the company distributed a total of US$0.5 per share to shareholders. Looking at the last 12 months of distributions, Seaspan has a trailing yield of approximately 4.5% on its current stock price of $11.17. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Seaspan can afford its dividend, and if the dividend could grow.
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. Seaspan has a low and conservative payout ratio of just 24% of its income after tax. 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. The good news is it paid out just 19% of its free cash flow in the last year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Seaspan's earnings per share have dropped 9.4% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
We'd also point out that Seaspan issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Seaspan has seen its dividend decline 12% per annum on average over the past ten 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
Is Seaspan worth buying for its dividend? Earnings per share are down meaningfully, although at least the company is paying out a low and conservative percentage of both its earnings and cash flow. It's definitely not great to see earnings falling, but at least there may be some buffer before the dividend needs to be cut. All things considered, we are not particularly enthused about Seaspan from a dividend perspective.
Wondering what the future holds for Seaspan? See what the six 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.
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