McChip Resources Inc. (CVE:MCS) has announced it will be reducing its dividend payable on the 1st of February to CA$0.04, which is 33% lower than what investors received last year for the same period. The yield is still above the industry average at 6.8%.
View our latest analysis for McChip Resources
McChip Resources Might Find It Hard To Continue The Dividend
If the payments aren't sustainable, a high yield for a few years won't matter that much. Despite not generating a profit, McChip Resources is still paying a dividend. The company is also yet to generate cash flow, so the dividend sustainability is definitely questionable.
Looking forward, earnings per share could 4.5% over the next year if the trend of the last few years can't be broken. This will push the company into unprofitability, which means the managers will have to choose between suspending the dividend, or paying it out of cash reserves.
Dividend Volatility
The company has a long dividend track record, but it doesn't look great with cuts in the past. The annual payment during the last 10 years was CA$0.05 in 2014, and the most recent fiscal year payment was CA$0.06. This implies that the company grew its distributions at a yearly rate of about 1.8% over that duration. 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's Growth Prospects Are Limited
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. It's not great to see that McChip Resources' earnings per share has fallen at approximately 4.5% per year over the past five years. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits.
We're Not Big Fans Of McChip Resources' Dividend
In summary, it's not great to see that the dividend is being cut, but it is probably understandable given that the current payment level was quite high. The company seems to be stretching itself a bit to make such big payments, but it doesn't appear they can be consistent over time. We don't think that this is a great candidate to be an income stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 5 warning signs for McChip Resources that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield 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.
About TSXV:MCS
Moderate with acceptable track record.
