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It Might Not Be A Great Idea To Buy Canadian Utilities Limited (TSE:CU) For Its Next Dividend

Canadian Utilities Limited (TSE:CU) stock is about to trade ex-dividend in 3 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, Canadian Utilities investors that purchase the stock on or after the 3rd of August will not receive the dividend, which will be paid on the 1st of September.

The company's next dividend payment will be CA$0.44 per share, on the back of last year when the company paid a total of CA$1.78 to shareholders. Looking at the last 12 months of distributions, Canadian Utilities has a trailing yield of approximately 4.3% on its current stock price of CA$41.45. If you buy this business for its dividend, you should have an idea of whether Canadian Utilities's dividend is reliable and sustainable. As a result, readers should always check whether Canadian Utilities has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Canadian Utilities

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 Utilities distributed an unsustainably high 115% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Canadian Utilities generated enough free cash flow to afford its dividend. Dividends consumed 63% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's good to see that while Canadian Utilities's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

historic-dividend
historic-dividend

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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that Canadian Utilities's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Canadian Utilities has increased its dividend at approximately 8.2% a year on average.

The Bottom Line

Should investors buy Canadian Utilities for the upcoming dividend? Flat earnings per share and a high payout ratio are not what we like to see, although at least it paid out a lower percentage of its free cash flow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

So if you're still interested in Canadian Utilities 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 Canadian Utilities (at least 1 which is potentially serious), and understanding these should be part of your investment process.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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