Stock Analysis

Read This Before Buying High Liner Foods Incorporated (TSE:HLF) For Its Dividend

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TSX:HLF
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Is High Liner Foods Incorporated (TSE:HLF) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

While High Liner Foods's 2.0% dividend yield is not the highest, we think its lengthy payment history is quite interesting. Some simple research can reduce the risk of buying High Liner Foods for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

historic-dividend
TSX:HLF Historic Dividend April 14th 2021

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, High Liner Foods paid out 20% of its profit as dividends. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. High Liner Foods' cash payout ratio last year was 5.9%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's positive to see that High Liner Foods' dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

We update our data on High Liner Foods every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. High Liner Foods has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was US$0.2 in 2011, compared to US$0.2 last year. This works out to be a compound annual growth rate (CAGR) of approximately 2.8% a year over that time. The dividends haven't grown at precisely 2.8% every year, but this is a useful way to average out the historical rate of growth.

It's good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We're not that enthused by this.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Over the past five years, it looks as though High Liner Foods' EPS have declined at around 2.4% a year. A modest decline in earnings per share is not great to see, but it doesn't automatically make a dividend unsustainable. Still, we'd vastly prefer to see EPS growth when researching dividend stocks.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, we like that the company's dividend payments appear well covered, although the retained capital also needs to be effectively reinvested. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In sum, we find it hard to get excited about High Liner Foods from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 3 warning signs for High Liner Foods that investors should know about before committing capital to this stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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