Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Canadian Utilities Limited (TSE:CU) is about to go ex-dividend in just four days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Accordingly, Canadian Utilities investors that purchase the stock on or after the 1st of May will not receive the dividend, which will be paid on the 1st of June.
The company's upcoming dividend is CA$0.4577 a share, following on from the last 12 months, when the company distributed a total of CA$1.83 per share to shareholders. Looking at the last 12 months of distributions, Canadian Utilities has a trailing yield of approximately 4.9% on its current stock price of CA$37.74. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Our free stock report includes 4 warning signs investors should be aware of before investing in Canadian Utilities. Read for free now.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Canadian Utilities paid out 122% 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. Over the past year it paid out 171% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
As Canadian Utilities'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.
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. Readers will understand then, why we're concerned to see Canadian Utilities's earnings per share have dropped 14% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Canadian Utilities has delivered an average of 5.5% per year annual increase in its dividend, based on the past 10 years of dividend payments. 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. Canadian Utilities is already paying out 122% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
Final Takeaway
Is Canadian Utilities worth buying for its dividend? Not only are earnings per share declining, but Canadian Utilities is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It's not that we think Canadian Utilities is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Although, if you're still interested in Canadian Utilities and want to know more, you'll find it very useful to know what risks this stock faces. For instance, we've identified 4 warning signs for Canadian Utilities (3 are a bit unpleasant) you should be aware of.
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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.
