It Might Not Be A Great Idea To Buy Shaw Communications Inc. (TSE:SJR.B) For Its Next Dividend

Readers hoping to buy Shaw Communications Inc. (TSE:SJR.B) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 13th of August in order to be eligible for this dividend, which will be paid on the 28th of August.

Shaw Communications's next dividend payment will be CA$0.099 per share. Last year, in total, the company distributed CA$1.19 to shareholders. Looking at the last 12 months of distributions, Shaw Communications has a trailing yield of approximately 4.8% on its current stock price of CA$24.73. If you buy this business for its dividend, you should have an idea of whether Shaw Communications's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Shaw Communications

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. Last year, Shaw Communications paid out 91% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. It paid out 105% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

Cash is slightly more important than profit from a dividend perspective, but given Shaw Communications's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Shaw Communications's earnings per share have fallen at approximately 6.7% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Shaw Communications has increased its dividend at approximately 3.5% 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. Shaw Communications is already paying out 91% 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 Shaw Communications for the upcoming dividend? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (91%) and cash flow as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. Bottom line: Shaw Communications has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Shaw Communications. To help with this, we've discovered 3 warning signs for Shaw Communications that you should be aware of before investing in their shares.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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