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We Wouldn't Be Too Quick To Buy Cardinal Energy Ltd. (TSE:CJ) Before It Goes Ex-Dividend

Simply Wall St

It looks like Cardinal Energy Ltd. (TSE:CJ) is about to go ex-dividend in the next 4 days. Investors can purchase shares before the 30th of July in order to be eligible for this dividend, which will be paid on the 15th of August.

Cardinal Energy's next dividend payment will be CA$0.015 per share, on the back of last year when the company paid a total of CA$0.12 to shareholders. Last year's total dividend payments show that Cardinal Energy has a trailing yield of 7.6% on the current share price of CA$2.37. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Cardinal Energy

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Cardinal Energy paid out more than half (64%) of its earnings last year, which is a regular payout ratio for most companies. 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. Over the past year it paid out 165% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cardinal 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 Cardinal 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.

TSX:CJ Historical Dividend Yield, July 25th 2019

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 Cardinal Energy's earnings per share have dropped 30% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Cardinal Energy's dividend payments per share have declined at 19% per year on average over the past 6 years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

Has Cardinal Energy got what it takes to maintain its dividend payments? Cardinal Energy had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not that we think Cardinal Energy is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

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

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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.