Headwater Exploration (TSE:HWX) Is Paying Out A Dividend Of CA$0.11

Headwater Exploration Inc.'s (TSE:HWX) investors are due to receive a payment of CA$0.11 per share on 15th of October. This means that the annual payment will be 6.1% of the current stock price, which is in line with the average for the industry.

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Headwater Exploration's Payment Could Potentially Have Solid Earnings Coverage

Unless the payments are sustainable, the dividend yield doesn't mean too much. Prior to this announcement, Headwater Exploration's dividend was only 54% of earnings, however it was paying out 117% of free cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

Over the next year, EPS is forecast to fall by 39.6%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 92%, which is definitely on the higher side.

View our latest analysis for Headwater Exploration

Headwater Exploration Doesn't Have A Long Payment History

Looking back, the dividend has been stable, but the company hasn't been paying a dividend for very long so we can't be confident that the dividend will remain stable through all economic environments. The dividend has gone from an annual total of CA$0.40 in 2022 to the most recent total annual payment of CA$0.44. This means that it has been growing its distributions at 3.2% per annum over that time. Modest dividend growth is good to see, especially with the payments being relatively stable. However, the payment history is relatively short and we wouldn't want to rely on this dividend too much.

The Dividend Looks Likely To Grow

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. We are encouraged to see that Headwater Exploration has grown earnings per share at 39% per year over the past five years. Headwater Exploration is clearly able to grow rapidly while still returning cash to shareholders, positioning it to become a strong dividend payer in the future.

Our Thoughts On Headwater Exploration's Dividend

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Headwater Exploration's payments, as there could be some issues with sustaining them into the future. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think Headwater Exploration is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Headwater Exploration has 2 warning signs (and 1 which is significant) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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