Readers hoping to buy Canadian Tire Corporation, Limited (TSE:CTC.A) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 29th of October to receive the dividend, which will be paid on the 1st of December.
Canadian Tire Corporation's next dividend payment will be CA$1.14 per share. Last year, in total, the company distributed CA$4.55 to shareholders. Based on the last year's worth of payments, Canadian Tire Corporation stock has a trailing yield of around 2.9% on the current share price of CA$154.82. If you buy this business for its dividend, you should have an idea of whether Canadian Tire Corporation's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
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. Canadian Tire Corporation paid out 55% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Canadian Tire Corporation generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 15% of its cash flow last year.
It's positive to see that Canadian Tire Corporation's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's not encouraging to see that Canadian Tire Corporation's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Canadian Tire Corporation has lifted its dividend by approximately 18% a year on average.
Is Canadian Tire Corporation worth buying for its dividend? Earnings per share have been flat and Canadian Tire Corporation's dividend payouts are within reasonable limits; without a sharp decline in earnings we feel that the dividend is likely somewhat sustainable. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Canadian Tire Corporation's dividend merits.
In light of that, while Canadian Tire Corporation has an appealing dividend, it's worth knowing the risks involved with this stock. For example, we've found 1 warning sign for Canadian Tire Corporation that we recommend you consider before investing in the business.
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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