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Terra Firma Capital Corporation's (CVE:TII) investors are due to receive a payment of CA$0.06 per share on 14th of January. This means the dividend yield will be fairly typical at 3.7%.
Terra Firma Capital's Payment Has Solid Earnings Coverage
We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Based on the last payment, Terra Firma Capital was earning enough to cover the dividend, but free cash flows weren't positive. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
If the trend of the last few years continues, EPS will grow by 5.7% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio will be 39%, which is in the range that makes us comfortable with the sustainability of the dividend.
Terra Firma Capital Is Still Building Its Track Record
The dividend has been pretty stable looking back, but the company hasn't been paying one for very long. This makes it tough to judge how it would fare through a full economic cycle. The dividend has gone from US$0.14 in 2018 to the most recent annual payment of US$0.19. This works out to be a compound annual growth rate (CAGR) of approximately 9.4% a year over that time. Investors will likely want to see a longer track record of growth before making decision to add this to their income portfolio.
Terra Firma Capital Could Grow Its Dividend
Investors could be attracted to the stock based on the quality of its payment history. Terra Firma Capital has seen EPS rising for the last five years, at 5.7% per annum. With a decent amount of growth and a low payout ratio, we think this bodes well for Terra Firma Capital's prospects of growing its dividend payments in the future.
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Terra Firma Capital's payments, as there could be some issues with sustaining them into the future. While Terra Firma Capital is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 2 warning signs for Terra Firma Capital that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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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.