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Don't Buy Shaw Communications Inc. (TSE:SJR.B) For Its Next Dividend Without Doing These Checks

Simply Wall St
·4 min read

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Shaw Communications Inc. (TSE:SJR.B) is about to go ex-dividend in just 3 days. You will need to purchase shares before the 13th of August to receive the dividend, which will be paid on the 28th of August.

Shaw Communications's next dividend payment will be CA$0.099 per share. Last year, in total, the company distributed CA$1.19 to shareholders. Looking at the last 12 months of distributions, Shaw Communications has a trailing yield of approximately 4.8% on its current stock price of CA$24.73. If you buy this business for its dividend, you should have an idea of whether Shaw Communications's dividend is reliable and sustainable. As a result, readers should always check whether Shaw Communications has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Shaw Communications

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. Last year, Shaw Communications paid out 91% 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. A useful secondary check can be to evaluate whether Shaw Communications generated enough free cash flow to afford its dividend. The company paid out 105% of its free cash flow over the last year, which we think is outside the ideal range 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 Shaw Communications's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

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?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Shaw Communications's earnings per share have fallen at approximately 6.7% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Shaw Communications has lifted its dividend by approximately 3.5% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Shaw Communications is already paying out 91% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Should investors buy Shaw Communications for the upcoming dividend? Not only are earnings per share declining, but Shaw Communications is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Although, if you're still interested in Shaw Communications and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 3 warning signs for Shaw Communications you should know about.

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.

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