Stelco Holdings Inc. (TSE:STLC) has announced that it will pay a dividend of CA$3.42 per share on the 28th of November. This means the annual payment is 4.0% of the current stock price, which is above the average for the industry.
Check out our latest analysis for Stelco Holdings
Stelco Holdings Doesn't Earn Enough To Cover Its Payments
If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, Stelco Holdings' earnings easily covered the dividend, but free cash flows were negative. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.
Earnings per share is forecast to rise by 12.7% over the next year. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 162% over the next year.
Stelco Holdings' Dividend Has Lacked Consistency
Looking back, Stelco Holdings' dividend hasn't been particularly consistent. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. The annual payment during the last 6 years was CA$0.40 in 2017, and the most recent fiscal year payment was CA$1.68. This works out to be a compound annual growth rate (CAGR) of approximately 27% a year over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.
The Dividend Has Limited Growth Potential
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Stelco Holdings' earnings per share has shrunk at 31% a year over the past five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.
Stelco Holdings' Dividend Doesn't Look Sustainable
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Stelco Holdings' payments, as there could be some issues with sustaining them into the future. While Stelco Holdings is earning enough to cover the payments, the cash flows are lacking. We don't think Stelco Holdings is a great stock to add to your portfolio if income is your focus.