The board of NFI Group Inc. (TSE:NFI) has announced that it will pay a dividend of CA$0.21 per share on the 15th of October. This means the annual payment is 3.5% of the current stock price, which is above the average for the industry.
NFI Group Might Find It Hard To Continue The Dividend
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Even while not generating a profit, NFI Group is paying out most of its free cash flows as a dividend. Generally it is unsustainable for a company to be paying a dividend while unprofitable, and with limited reinvestment into the business growth may be slow.
Over the next year, EPS might fall by 44.4% based on recent performance. This means the company won't be turning a profit, which could place managers in the tough spot of having to choose between suspending the dividend or putting more pressure on the balance sheet.
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The first annual payment during the last 10 years was US$3.00 in 2011, and the most recent fiscal year payment was US$0.66. The dividend has fallen 78% over that period. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.
The Dividend Has Limited Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Over the past five years, it looks as though NFI Group's EPS has declined at around 44% a year. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future.
The company has also been raising capital by issuing stock equal to 14% of shares outstanding in the last 12 months. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
NFI Group's Dividend Doesn't Look Sustainable
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. The track record isn't great, and the payments are a bit high to be considered sustainable. This company is not in the top tier of income providing stocks.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, NFI Group has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about. We have also put together a list of global stocks with a solid dividend.
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