Here’s Why We’re Wary Of Buying Whitecap Resources Inc.’s (TSE:WCP) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Whitecap Resources Inc. (TSE:WCP) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 29th of August to receive the dividend, which will be paid on the 16th of September.

Whitecap Resources’s next dividend payment will be CA$0.029 per share, and in the last 12 months, the company paid a total of CA$0.34 per share. Last year’s total dividend payments show that Whitecap Resources has a trailing yield of 9.4% on the current share price of CA$3.64. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! As a result, readers should always check whether Whitecap Resources has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Whitecap Resources

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Whitecap Resources distributed an unsustainably high 163% of its profit as dividends to shareholders last year. Without extenuating circumstances, we’d consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 45% of its free cash flow as dividends, a comfortable payout level for most companies.

It’s disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Whitecap Resources fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we’d view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

TSX:WCP Historical Dividend Yield, August 24th 2019
TSX:WCP Historical Dividend Yield, August 24th 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Whitecap Resources’s earnings per share have fallen at approximately 5.9% a year over the previous 5 years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Whitecap Resources has seen its dividend decline 7.7% per annum on average over the past 7 years, which is not great to see. While it’s not great that earnings and dividends per share have fallen in recent years, we’re encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

Is Whitecap Resources an attractive dividend stock, or better left on the shelf? It’s never great to see earnings per share declining, especially when a company is paying out 163% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Whitecap Resources’s cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It’s not the most attractive proposition from a dividend perspective, and we’d probably give this one a miss for now.

Ever wonder what the future holds for Whitecap Resources? See what the four analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.