We Wouldn’t Be Too Quick To Buy Algoma Central Corporation (TSE:ALC) Before It Goes Ex-Dividend
Algoma Central Corporation (TSE:ALC) stock is about to trade ex-dividend in 4 days. You will need to purchase shares before the 17th of August to receive the dividend, which will be paid on the 1st of September.
Algoma Central’s next dividend payment will be CA$0.13 per share. Last year, in total, the company distributed CA$0.52 to shareholders. Based on the last year’s worth of payments, Algoma Central stock has a trailing yield of around 4.9% on the current share price of CA$10.6. 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 investigate whether Algoma Central can afford its dividend, and if the dividend could grow.
Check out our latest analysis for Algoma Central
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Last year, Algoma Central paid out 90% of its income as dividends, which is above a level that we’re comfortable with, especially if the company needs to reinvest in its business. 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. The good news is it paid out just 18% of its free cash flow in the last year.
It’s good to see that while Algoma Central’s dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we’re discomforted by Algoma Central’s 17% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Algoma Central has delivered an average of 11% per year annual increase in its dividend, based on the past 10 years of dividend payments. 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. Algoma Central 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 Algoma Central got what it takes to maintain its dividend payments? It’s never great to see earnings per share declining, especially when a company is paying out 90% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower – good news from a dividend perspective – which makes us wonder why there is such a mis-match between income and cashflow. With the way things are shaping up from a dividend perspective, we’d be inclined to steer clear of Algoma Central.
