Headwater Exploration's (TSE:HWX) Shareholders Will Receive A Bigger Dividend Than Last Year

The board of Headwater Exploration Inc. (TSE:HWX) has announced that it will be paying its dividend of CA$0.11 on the 15th of April, an increased payment from last year's comparable dividend. This makes the dividend yield 7.0%, which is above the industry average.

See our latest analysis for Headwater Exploration

Headwater Exploration's Payment Could Potentially Have Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, Headwater Exploration's dividend was only 50% of earnings, however it was paying out 111% of free cash flows. This signals that the company is more focused on returning cash flow to shareholders, but it could mean that the dividend is exposed to cuts in the future.

Looking forward, earnings per share is forecast to fall by 42.2% over the next year. If recent patterns in the dividend continue, we could see the payout ratio reaching 90% in the next 12 months, which is on the higher end of the range we would say is sustainable.

Headwater Exploration Doesn't Have A Long Payment History

The dividend hasn't seen any major cuts in the past, but the company has only been paying a dividend for 2 years, which isn't that long in the grand scheme of things. Since 2023, the dividend has gone from CA$0.40 total annually to CA$0.44. This works out to be a compound annual growth rate (CAGR) of approximately 4.9% a year over that time. It's good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn't want to depend on this dividend too heavily.

The Dividend Looks Likely To Grow

The company's investors will be pleased to have been receiving dividend income for some time. Headwater Exploration has impressed us by growing EPS at 90% 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.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Headwater Exploration's payments are rock solid. While Headwater Exploration is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 2 warning signs for Headwater Exploration (of which 1 makes us a bit uncomfortable!) you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.