Terra Firma Capital Corporation (CVE:TII) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 30th of March will not receive this dividend, which will be paid on the 15th of April.
Terra Firma Capital’s next dividend payment will be CA$0.05 per share. Last year, in total, the company distributed CA$0.14 to shareholders. Looking at the last 12 months of distributions, Terra Firma Capital has a trailing yield of approximately 4.1% on its current stock price of CA$5. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are 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. Terra Firma Capital is paying out just 5.4% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. Terra Firma Capital paid a dividend despite reporting negative free cash flow last year. That’s typically a bad combination and – if this were more than a one-off – not sustainable.
When a company paid out less in dividends than it earned in profit, this generally suggests its dividend is affordable. The lower the % of its profit that it pays out, the greater the margin of safety for the dividend if the business enters a downturn.
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 Terra Firma Capital earnings per share are up 6.0% per annum over the last five years.
Given that Terra Firma Capital has only been paying a dividend for a year, there’s not much of a past history to draw insight from.
The Bottom Line
Should investors buy Terra Firma Capital for the upcoming dividend? Terra Firma Capital has seen its earnings per share grow slowly in recent years, and the company reinvests more than half of its profits in the business, which generally bodes well for its future prospects. Overall, Terra Firma Capital looks like a promising dividend stock in this analysis, and we think it would be worth investigating further.
In light of that, while Terra Firma Capital has an appealing dividend, it’s worth knowing the risks involved with this stock. To help with this, we’ve discovered 5 warning signs for Terra Firma Capital (1 is a bit unpleasant!) that you ought to be aware of before buying the shares.
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 firstname.lastname@example.org. 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.