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Tree Island Steel Ltd. (TSE:TSL) has announced that it will pay a dividend of CA$0.03 per share on the 15th of January. This means the annual payment is 4.3% of the current stock price, which is above the average for the industry.
Check out our latest analysis for Tree Island Steel
Tree Island Steel Might Find It Hard To Continue The Dividend
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Even in the absence of profits, Tree Island Steel is paying a dividend. It is also not generating any free cash flow, we definitely have concerns when it comes to the sustainability of the dividend.
Over the next year, EPS could expand by 10.3% if recent trends continue. The company seems to be going down the right path, but it will probably take a little bit longer than a year to cross over into profitability. Unless this happens fairly soon, the dividend could start to come under pressure.
Tree Island Steel's Dividend Has Lacked Consistency
Tree Island Steel has been paying dividends for a while, but the track record isn't stellar. This suggests that the dividend might not be the most reliable. Since 2015, the dividend has gone from CA$0.04 total annually to CA$0.12. This works out to be a compound annual growth rate (CAGR) of approximately 13% 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 Company Could Face Some Challenges Growing The Dividend
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. We are encouraged to see that Tree Island Steel has grown earnings per share at 10% per year over the past five years. It's not great that the company is not turning a profit, but the decent growth in recent years is certainly a positive sign. As long as the company becomes profitable soon, it is on a trajectory that could see it being a solid dividend payer.
Tree Island Steel's Dividend Doesn't Look Sustainable
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. Overall, we don't think this company has the makings of a good income stock.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We've spotted 2 warning signs for Tree Island Steel (of which 1 is concerning!) you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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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.