Advertisement

Here's Why We're Wary Of Buying Canadian Utilities' (TSE:CU) For Its Upcoming Dividend

Canadian Utilities Limited (TSE:CU) stock is about to trade ex-dividend in four days. You can purchase shares before the 4th of November in order to receive the dividend, which the company will pay on the 1st of December.

Canadian Utilities's upcoming dividend is CA$0.44 a share, following on from the last 12 months, when the company distributed a total of CA$1.74 per share to shareholders. Based on the last year's worth of payments, Canadian Utilities stock has a trailing yield of around 5.2% on the current share price of CA$33.24. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is 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. It paid out 78% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. 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. It paid out 96% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Canadian Utilities paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Canadian Utilities's ability to maintain its dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's not ideal to see Canadian Utilities's earnings per share have been shrinking at 2.7% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Canadian Utilities has increased its dividend at approximately 8.7% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Canadian Utilities is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Has Canadian Utilities got what it takes to maintain its dividend payments? Canadian Utilities had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Canadian Utilities.

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. We've identified 3 warning signs with Canadian Utilities (at least 1 which is a bit concerning), and understanding these should be part of your investment process.

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.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.