We Wouldn't Be Too Quick To Buy Covanta Holding Corporation (NYSE:CVA) Before It Goes Ex-Dividend

Covanta Holding Corporation (NYSE:CVA) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 25th of September in order to be eligible for this dividend, which will be paid on the 9th of October.

Covanta Holding's upcoming dividend is US$0.08 a share, following on from the last 12 months, when the company distributed a total of US$0.32 per share to shareholders. Based on the last year's worth of payments, Covanta Holding stock has a trailing yield of around 3.9% on the current share price of $8.29. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Covanta Holding

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Covanta Holding reported a loss last year, so it's not great to see that it has continued paying a dividend. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Over the last year, it paid out more than three-quarters (89%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Covanta Holding was unprofitable last year, but at least the general trend suggests its earnings have been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Covanta Holding has delivered an average of 0.6% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Remember, you can always get a snapshot of Covanta Holding's financial health, by checking our visualisation of its financial health, here.

The Bottom Line

Has Covanta Holding got what it takes to maintain its dividend payments? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Covanta Holding.

With that in mind though, if the poor dividend characteristics of Covanta Holding don't faze you, it's worth being mindful of the risks involved with this business. Case in point: We've spotted 2 warning signs for Covanta Holding you should be aware of.

If you're in the market for dividend stocks, we recommend checking our list of top 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.

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