Source Rock Royalties (CVE:SRR) Is Paying Out A Dividend Of CA$0.006

Source Rock Royalties Ltd. (CVE:SRR) has announced that it will pay a dividend of CA$0.006 per share on the 15th of April. This means the annual payment is 8.6% of the current stock price, which is above the average for the industry.

See our latest analysis for Source Rock Royalties

Source Rock Royalties Doesn't Earn Enough To Cover Its Payments

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, the dividend made up 162% of earnings, and the company was generating negative free cash flows. Paying out such a large dividend compared to earnings while also not generating any free cash flow would definitely be difficult to keep up.

Earnings per share could rise by 21.8% over the next year if things go the same way as they have for the last few years. Assuming the dividend continues along recent trends, we think the payout ratio could reach 170%, which probably can't continue without starting to put some pressure on the balance sheet.

Source Rock Royalties 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. The annual payment during the last 2 years was CA$0.06 in 2022, and the most recent fiscal year payment was CA$0.072. This works out to be a compound annual growth rate (CAGR) of approximately 9.5% a year over that time. Source Rock Royalties has been growing its dividend at a decent rate, and the payments have been stable. However, the payment history is very short, so there is no evidence yet that the dividend can be sustained over a full economic cycle.

Dividend Growth Could Be Constrained

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Source Rock Royalties has impressed us by growing EPS at 22% per year over the past five years. While EPS is growing rapidly, Source Rock Royalties paid out a very high 162% of its income as dividends. If earnings continue to grow, this dividend may be sustainable, but we think a payout this high definitely bears watching.

Source Rock Royalties' Dividend Doesn't Look Sustainable

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. Strong earnings growth means Source Rock Royalties has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 5 warning signs for Source Rock Royalties (of which 2 make us uncomfortable!) you should know about. 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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