Hardwoods Distribution Inc. (TSE:HDI) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 17th of January will not receive the dividend, which will be paid on the 31st of January.
Hardwoods Distribution’s upcoming dividend is CA$0.085 a share, following on from the last 12 months, when the company distributed a total of CA$0.34 per share to shareholders. Calculating the last year’s worth of payments shows that Hardwoods Distribution has a trailing yield of 2.0% on the current share price of CA$16.87. 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 Hardwoods Distribution can afford its dividend, and if the dividend could grow.
Check out our latest analysis for Hardwoods Distribution
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Hardwoods Distribution paid out just 23% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. The good news is it paid out just 10% of its free cash flow in the last year.
It’s positive to see that Hardwoods Distribution’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.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we’re glad to see Hardwoods Distribution’s earnings per share have risen 11% per annum over the last five years. Earnings per share have been growing rapidly and the company is retaining a majority of its earnings within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the last nine years, Hardwoods Distribution has lifted its dividend by approximately 17% a year on average. It’s great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
Has Hardwoods Distribution got what it takes to maintain its dividend payments? We love that Hardwoods Distribution is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. It’s a promising combination that should mark this company worthy of closer attention.
Wondering what the future holds for Hardwoods Distribution? See what the five analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
If you spot an error that warrants correction, please contact the editor at [email protected]. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
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