Don't Buy Wajax Corporation (TSE:WJX) For Its Next Dividend Without Doing These Checks

Readers hoping to buy Wajax Corporation (TSE:WJX) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 14th of September in order to receive the dividend, which the company will pay on the 2nd of October.

Wajax's upcoming dividend is CA$0.25 a share, following on from the last 12 months, when the company distributed a total of CA$1.00 per share to shareholders. Based on the last year's worth of payments, Wajax has a trailing yield of 8.3% on the current stock price of CA$12.12. 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 Wajax can afford its dividend, and if the dividend could grow.

View our latest analysis for Wajax

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Wajax paid out 59% of its earnings to investors last year, a normal payout level for most businesses. 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. Over the last year it paid out 60% of its free cash flow as dividends, within the usual range for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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. 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 Wajax's 7.1% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Wajax's dividend payments per share have declined at 5.7% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Final Takeaway

Has Wajax got what it takes to maintain its dividend payments? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. Bottom line: Wajax has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

So if you're still interested in Wajax despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 3 warning signs with Wajax (at least 1 which doesn't sit too well with us), and understanding them 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.

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