Is It Worth Considering Hammond Power Solutions Inc. (TSE:HPS.A) For Its Upcoming Dividend?

By
Simply Wall St
Published
March 11, 2022
TSX:HPS.A
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It looks like Hammond Power Solutions Inc. (TSE:HPS.A) is about to go ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase Hammond Power Solutions' shares before the 16th of March to receive the dividend, which will be paid on the 24th of March.

The company's upcoming dividend is CA$0.085 a share, following on from the last 12 months, when the company distributed a total of CA$0.34 per share to shareholders. Last year's total dividend payments show that Hammond Power Solutions has a trailing yield of 2.9% on the current share price of CA$11.91. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Hammond Power Solutions has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Hammond Power Solutions

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Hammond Power Solutions paid out a comfortable 27% of its profit last year. 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 an unsustainably high 218% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Hammond Power Solutions is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

Hammond Power Solutions paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Hammond Power Solutions to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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 10th 2022

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we're glad to see Hammond Power Solutions's earnings per share have risen 19% per annum over the last five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Hammond Power Solutions has delivered an average of 8.5% per year annual increase in its dividend, based on the past 10 years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

Is Hammond Power Solutions worth buying for its dividend? We like that Hammond Power Solutions has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. To summarise, Hammond Power Solutions looks okay on this analysis, although it doesn't appear a stand-out opportunity.

On that note, you'll want to research what risks Hammond Power Solutions is facing. Our analysis shows 1 warning sign for Hammond Power Solutions and you should be aware of this before buying any shares.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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