It looks like Terra Firma Capital Corporation (CVE:TII) is about to go ex-dividend in the next 2 days. Ex-dividend means that investors that purchase the stock on or after the 30th of March will not receive this dividend, which will be paid on the 15th of April.
Terra Firma Capital's next dividend payment will be CA$0.05 per share, on the back of last year when the company paid a total of CA$0.14 to shareholders. Calculating the last year's worth of payments shows that Terra Firma Capital has a trailing yield of 4.4% on the current share price of CA$4.5. 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 investigate whether Terra Firma Capital can afford its dividend, and if the dividend could grow.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Terra Firma Capital is paying out just 5.4% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. Terra Firma Capital paid a dividend despite reporting negative free cash flow over the last twelve months. This may be due to heavy investment in the business, but this is still suboptimal from a dividend sustainability perspective.
Companies that pay out less in dividends than they earn in profits generally have more sustainable dividends. The lower the payout ratio, the more wiggle room the business has before it could be forced to cut the 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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Terra Firma Capital, with earnings per share up 6.0% on average over the last five years.
Given that Terra Firma Capital has only been paying a dividend for a year, there's not much of a past history to draw insight from.
From a dividend perspective, should investors buy or avoid Terra Firma Capital? It has been growing its earnings per share somewhat in recent years, although it reinvests more than half its earnings in the business, which could suggest there are some growth projects that have not yet reached fruition. We think this is a pretty attractive combination, and would be interested in investigating Terra Firma Capital more closely.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. We've identified 5 warning signs with Terra Firma Capital (at least 1 which is a bit concerning), and understanding them should be part of your investment process.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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