Yahoo Finance Why It Might Not Make Sense To Buy Russel Metals Inc. (TSE:RUS) For Its Upcoming Dividend
Readers hoping to buy Russel Metals Inc. (TSE:RUS) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. This means that investors who purchase shares on or after the 27th of February will not receive the dividend, which will be paid on the 16th of March.
Russel Metals's next dividend payment will be CA$0.38 per share, and in the last 12 months, the company paid a total of CA$1.52 per share. Looking at the last 12 months of distributions, Russel Metals has a trailing yield of approximately 6.9% on its current stock price of CA$21.92. If you buy this business for its dividend, you should have an idea of whether Russel Metals's dividend is reliable and sustainable. As a result, readers should always check whether Russel Metals has been able to grow its dividends, or if the dividend might be cut.
Check out our latest analysis for Russel Metals
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. Russel Metals distributed an unsustainably high 123% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Thankfully its dividend payments took up just 44% of the free cash flow it generated, which is a comfortable payout ratio.
It's good to see that while Russel Metals's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Russel Metals's earnings per share have dropped 9.3% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last ten years, Russel Metals has lifted its dividend by approximately 4.3% 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. Russel Metals is already paying out 123% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
The Bottom Line
Should investors buy Russel Metals for the upcoming dividend? It's not a great combination to see a company with earnings in decline and paying out 123% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
Ever wonder what the future holds for Russel Metals? See what the five analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
