Why You Might Be Interested In McChip Resources Inc. (CVE:MCS) For Its Upcoming Dividend

It looks like McChip Resources Inc. (CVE:MCS) is about to go ex-dividend in the next four days. Ex-dividend means that investors that purchase the stock on or after the 13th of January will not receive this dividend, which will be paid on the 21st of January.

McChip Resources's next dividend payment will be CA$0.04 per share, which looks like a nice increase on last year, when the company distributed a total of CA$0.02 to shareholders. If you buy this business for its dividend, you should have an idea of whether McChip Resources's dividend is reliable and sustainable. So we need to investigate whether McChip Resources can afford its dividend, and if the dividend could grow.

View our latest analysis for McChip Resources

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. McChip Resources is paying out just 8.3% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out more than half (65%) of its free cash flow in the past year, which is within an average range for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see how much of its profit McChip Resources paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see McChip Resources earnings per share are up 7.1% per annum over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. McChip Resources's dividend payments per share have declined at 15% per year on average over the past 10 years, which is uninspiring. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.

Final Takeaway

From a dividend perspective, should investors buy or avoid McChip Resources? Earnings per share growth has been modest, and it's interesting that McChip Resources is paying out less than half of its earnings and more than half its cash flow to shareholders in the form of dividends. To summarise, McChip Resources looks okay on this analysis, although it doesn't appear a stand-out opportunity.

In light of that, while McChip Resources has an appealing dividend, it's worth knowing the risks involved with this stock. We've identified 5 warning signs with McChip Resources (at least 3 which shouldn't be ignored), and understanding them should be part of your investment process.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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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. 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.
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