Do Investors Have Good Reason To Be Wary Of TWC Enterprises Limited's (TSE:TWC) 0.7% Dividend Yield?

Is TWC Enterprises Limited (TSE:TWC) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

A 0.7% yield is nothing to get excited about, but investors probably think the long payment history suggests TWC Enterprises has some staying power. The company also bought back stock during the year, equivalent to approximately 3.7% of the company's market capitalisation at the time. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Explore this interactive chart for our latest analysis on TWC Enterprises!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. While TWC Enterprises pays a dividend, it reported a loss over the last year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

TWC Enterprises' cash payout ratio last year was 5.6%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout.

With a strong net cash balance, TWC Enterprises investors may not have much to worry about in the near term from a dividend perspective.

We update our data on TWC Enterprises every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. TWC Enterprises 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 declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was CA$0.3 in 2010, compared to CA$0.08 last year. Dividend payments have fallen sharply, down 73% over that time.

We struggle to make a case for buying TWC Enterprises for its dividend, given that payments have shrunk over the past 10 years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. TWC Enterprises' earnings per share have shrunk at 28% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and TWC Enterprises' earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that TWC Enterprises' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. 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 TWC Enterprises' dividend has been cut at least once in the past, which is disappointing. With this information in mind, we think TWC Enterprises may not be an ideal dividend stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, TWC Enterprises has 2 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 market capitalisation above $1bn and yielding more 3%.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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