Is It Smart To Buy Hammond Power Solutions Inc. (TSE:HPS.A) Before It Goes Ex-Dividend?

By
Simply Wall St
Published
March 11, 2021
TSX:HPS.A
Source: Shutterstock

Readers hoping to buy Hammond Power Solutions Inc. (TSE:HPS.A) 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 17th of March will not receive the dividend, which will be paid on the 25th of March.

Hammond Power Solutions's next dividend payment will be CA$0.085 per share, on the back of last year when the company paid a total of CA$0.34 to shareholders. Calculating the last year's worth of payments shows that Hammond Power Solutions has a trailing yield of 3.6% on the current share price of CA$9.4. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Hammond Power Solutions

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. That's why it's good to see Hammond Power Solutions paying out a modest 27% of its earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. What's good is that dividends were well covered by free cash flow, with the company paying out 15% of its cash flow last year.

It's positive to see that Hammond Power Solutions's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see how much of its profit Hammond Power Solutions paid out over the last 12 months.

historic-dividend
TSX:HPS.A Historic Dividend March 12th 2021

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. It's encouraging to see Hammond Power Solutions has grown its earnings rapidly, up 40% a year for the past five years. Hammond Power Solutions is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Hammond Power Solutions has lifted its dividend by approximately 10% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

The Bottom Line

Is Hammond Power Solutions worth buying for its dividend? Hammond Power Solutions has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. It's a promising combination that should mark this company worthy of closer attention.

While it's tempting to invest in Hammond Power Solutions for the dividends alone, you should always be mindful of the risks involved. For example, we've found 1 warning sign for Hammond Power Solutions that we recommend you consider before investing in the business.

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.

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