Dividend paying stocks like Quarterhill Inc. (TSE:QTRH) tend to be popular with investors, and for good reason – some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.
So you may wish to consider our analysis of Quarterhill’s financial health, here.
A slim 2.8% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Quarterhill could have potential. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.
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Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Although Quarterhill pays a dividend, it was loss-making during the past year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.
Quarterhill paid out 24% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable.
With a strong net cash balance, Quarterhill investors may not have much to worry about in the near term from a dividend perspective.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Quarterhill has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have fallen by 20% or more on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was US$0.043 in 2009, compared to US$0.038 last year. The dividend has shrunk at around 1.3% a year during that period. Quarterhill’s dividend hasn’t shrunk linearly at 1.3% per annum, but the CAGR is a useful estimate of the historical rate of change.
We struggle to make a case for buying Quarterhill for its dividend, given that payments have shrunk over the past ten years.
Dividend Growth Potential
With a relatively unstable dividend, it’s even more important to evaluate if earnings per share (EPS) are growing – it’s not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Over the past five years, it looks as though Quarterhill’s EPS have declined at around 58% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Quarterhill’s earnings per share, which support the dividend, have been anything but stable.
Conclusion
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We’re a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Earnings per share are down, and Quarterhill’s dividend has been cut at least once in the past, which is disappointing. In summary, Quarterhill has a number of shortcomings that we’d find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.
Given that earnings are not growing, the dividend does not look nearly so attractive. Very few businesses see earnings consistently shrink year after year in perpetuity though, and so it might be worth seeing what the 3 analysts we track are forecasting for the future.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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.
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