The board of TerraVest Industries Inc. (TSE:TVK) has announced that it will pay a dividend of CA$0.10 per share on the 10th of January. This payment means the dividend yield will be 1.4%, which is below the average for the industry.
TerraVest Industries' Earnings Easily Cover the Distributions
Even a low dividend yield can be attractive if it is sustained for years on end. Prior to this announcement, TerraVest Industries' dividend was only 20% of earnings, however it was paying out 180% of free cash flows. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.
Over the next year, EPS could expand by 38.0% if recent trends continue. If the dividend continues on this path, the payout ratio could be 14% by next year, which we think can be pretty sustainable going forward.
TerraVest Industries' Dividend Has Lacked Consistency
Even in its relatively short history, the company has reduced the dividend at least once. This suggests that the dividend might not be the most reliable. The dividend has gone from CA$0.32 in 2012 to the most recent annual payment of CA$0.40. This works out to be a compound annual growth rate (CAGR) of approximately 2.5% a year over that time. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.
The Dividend Looks Likely To Grow
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. TerraVest Industries has seen EPS rising for the last five years, at 38% per annum. Rapid earnings growth and a low payout ratio suggest this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. While TerraVest Industries is earning enough to cover the payments, the cash flows are lacking. This company is not in the top tier of income providing stocks.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 1 warning sign for TerraVest Industries that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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