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Is It Smart To Buy Canadian National Railway Company (TSE:CNR) Before It Goes Ex-Dividend?

Readers hoping to buy Canadian National Railway Company (TSE:CNR) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, Canadian National Railway investors that purchase the stock on or after the 7th of December will not receive the dividend, which will be paid on the 29th of December.

The company's next dividend payment will be CA$0.73 per share. Last year, in total, the company distributed CA$2.93 to shareholders. Based on the last year's worth of payments, Canadian National Railway has a trailing yield of 1.7% on the current stock price of CA$172.67. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Canadian National Railway has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Canadian National Railway

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. Fortunately Canadian National Railway's payout ratio is modest, at just 40% of profit. 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. Dividends consumed 52% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

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It's positive to see that Canadian National Railway's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

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historic-dividend

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Canadian National Railway earnings per share are up 9.1% per annum over the last five years. Decent historical earnings per share growth suggests Canadian National Railway has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.

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 National Railway has increased its dividend at approximately 15% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

From a dividend perspective, should investors buy or avoid Canadian National Railway? Earnings per share have been growing at a steady rate, and Canadian National Railway paid out less than half its profits and more than half its free cash flow as dividends over the last year. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Canadian National Railway's dividend merits.

On that note, you'll want to research what risks Canadian National Railway is facing. Case in point: We've spotted 2 warning signs for Canadian National Railway you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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