Yahoo Finance Dividend Investors: Don't Be Too Quick To Buy Computer Modelling Group Ltd. (TSE:CMG) For Its Upcoming Dividend
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Computer Modelling Group Ltd. (TSE:CMG) is about to trade ex-dividend in the next four days. Investors can purchase shares before the 3rd of September in order to be eligible for this dividend, which will be paid on the 15th of September.
Computer Modelling Group's upcoming dividend is CA$0.05 a share, following on from the last 12 months, when the company distributed a total of CA$0.20 per share to shareholders. Looking at the last 12 months of distributions, Computer Modelling Group has a trailing yield of approximately 3.8% on its current stock price of CA$5.29. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
View our latest analysis for Computer Modelling Group
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Computer Modelling Group distributed an unsustainably high 126% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. It paid out 94% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.
Cash is slightly more important than profit from a dividend perspective, but given Computer Modelling Group's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Computer Modelling Group's earnings per share have dropped 7.7% a year over 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. Computer Modelling Group's dividend payments per share have declined at 1.6% per year on average over the past 10 years, which is uninspiring.
Final Takeaway
Has Computer Modelling Group got what it takes to maintain its dividend payments? Not only are earnings per share declining, but Computer Modelling Group is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Computer Modelling Group.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Computer Modelling Group. In terms of investment risks, we've identified 2 warning signs with Computer Modelling Group and understanding them should be part of your investment process.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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