Headwater Exploration Inc. (TSE:HWX) Pays A CA$0.11 Dividend In Just Three Days

Headwater Exploration Inc. (TSE:HWX) stock is about to trade ex-dividend in three days. Typically, the ex-dividend date is two business days 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 at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Therefore, if you purchase Headwater Exploration's shares on or after the 31st of March, you won't be eligible to receive the dividend, when it is paid on the 15th of April.

The company's upcoming dividend is CA$0.11 a share, following on from the last 12 months, when the company distributed a total of CA$0.44 per share to shareholders. Last year's total dividend payments show that Headwater Exploration has a trailing yield of 6.7% on the current share price of CA$6.56. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. 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. Headwater Exploration is paying out an acceptable 50% of its profit, a common payout level among most companies. 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. The company paid out 101% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Headwater Exploration 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 Headwater Exploration to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

See our latest analysis for Headwater Exploration

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see Headwater Exploration's earnings have been skyrocketing, up 90% per annum for the past five years. Earnings have been growing quickly, 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. Headwater Exploration has delivered an average of 4.9% per year annual increase in its dividend, based on the past two years of dividend payments. Earnings per share have been growing much quicker than dividends, potentially because Headwater Exploration is keeping back more of its profits to grow the business.

To Sum It Up

Should investors buy Headwater Exploration for the upcoming dividend? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Headwater Exploration paid out a much higher percentage of its free cash flow, which makes us uncomfortable. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

With that being said, if dividends aren't your biggest concern with Headwater Exploration, you should know about the other risks facing this business. To that end, you should learn about the 2 warning signs we've spotted with Headwater Exploration (including 1 which doesn't sit too well with us).

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.