Pason Systems Inc.'s (TSE:PSI) investors are due to receive a payment of CA$0.05 per share on 29th of September. Based on this payment, the dividend yield on the company's stock will be 2.4%, which is an attractive boost to shareholder returns.
Pason Systems' Dividend Is Well Covered By Earnings
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before making this announcement, the company's dividend was higher than its profits, and made up 93% of cash flows. While the cash payout ratio isn't necessarily a cause for concern, the company is probably focusing more on returning cash to shareholders than growing the business.
Analysts expect a massive rise in earnings per share in the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 47%, which would make us comfortable with the dividend's sustainability, despite the levels currently being elevated.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from CA$0.34 in 2011 to the most recent annual payment of CA$0.20. The dividend has shrunk at around 5.2% a year during that period. A company that decreases its dividend over time generally isn't what we are looking for.
Pason Systems Might Find It Hard To Grow Its Dividend
Dividends have been going in the wrong direction, so we definitely want to see a different trend in the earnings per share. Pason Systems has seen EPS rising for the last five years, at 32% per annum. EPS has been growing well, but Pason Systems has been paying out a massive proportion of its earnings, which can make the dividend tough to maintain.
The Dividend Could Prove To Be Unreliable
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Pason Systems' payments, as there could be some issues with sustaining them into the future. Strong earnings growth means Pason Systems has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. Overall, we don't think this company has the makings of a good income stock.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 3 warning signs for Pason Systems that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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