Canadian National Railway Company (TSE:CNR) stock is about to trade ex-dividend in 4 days. Investors can purchase shares before the 8th of September in order to be eligible for this dividend, which will be paid on the 30th of September.
Canadian National Railway’s upcoming dividend is CA$0.57 a share, following on from the last 12 months, when the company distributed a total of CA$2.30 per share to shareholders. Based on the last year’s worth of payments, Canadian National Railway stock has a trailing yield of around 1.7% on the current share price of CA$137.05. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it’s growing.
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. That’s why it’s good to see Canadian National Railway paying out a modest 44% of its earnings. 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. Over the last year it paid out 56% of its free cash flow as dividends, within the usual range for most companies.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it’s a relief to see Canadian National Railway earnings per share are up 5.6% per annum over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. If management lifts the payout ratio further, we’d take this as a tacit signal that the company’s growth prospects are slowing.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Canadian National Railway has lifted its dividend by approximately 16% 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.
From a dividend perspective, should investors buy or avoid Canadian National Railway? Earnings per share growth has been modest, and it’s interesting that Canadian National Railway is paying out less than half of its earnings and more than half its cash flow to shareholders in the form of dividends. All things considered, we are not particularly enthused about Canadian National Railway from a dividend perspective.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. To help with this, we’ve discovered 2 warning signs for Canadian National Railway that you should be aware of before investing in their shares.
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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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. 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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