Yahoo Finance Don't Buy Gamehost Inc. (TSE:GH) For Its Next Dividend Without Doing These Checks
Readers hoping to buy Gamehost Inc. (TSE:GH) 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 30th of July in order to receive the dividend, which the company will pay on the 15th of August.
Gamehost's next dividend payment will be CA$0.058 per share, on the back of last year when the company paid a total of CA$0.69 to shareholders. Calculating the last year's worth of payments shows that Gamehost has a trailing yield of 7.6% on the current share price of CA$9.09. 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.
See our latest analysis for Gamehost
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, Gamehost paid out 107% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 88% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Gamehost fortunately did generate enough cash to fund its dividend. 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 how much of its profit Gamehost paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Gamehost's 5.8% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Gamehost has seen its dividend decline 5.8% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
To Sum It Up
From a dividend perspective, should investors buy or avoid Gamehost? Earnings per share have been in decline, which is not encouraging. What's more, Gamehost is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. Bottom line: Gamehost has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Curious about whether Gamehost has been able to consistently generate growth? Here's a chart of its historical revenue and earnings growth.
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.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Thank you for reading.
