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Canadian Utilities Limited (TSE:CU) stock is about to trade ex-dividend in 2 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, Canadian Utilities investors that purchase the stock on or after the 6th of February will not receive the dividend, which will be paid on the 1st of March.
The company's next dividend payment will be CA$0.4577 per share, on the back of last year when the company paid a total of CA$1.81 to shareholders. Calculating the last year's worth of payments shows that Canadian Utilities has a trailing yield of 5.4% on the current share price of CA$33.95. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
Check out our latest analysis for Canadian Utilities
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. Canadian Utilities distributed an unsustainably high 116% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Canadian Utilities paid out more free cash flow than it generated - 125%, to be precise - last year, which we think is concerningly 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.
Cash is slightly more important than profit from a dividend perspective, but given Canadian Utilities's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Canadian Utilities's 5.7% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.