Neo Performance Materials (TSE:NEO) Is Paying Out A Dividend Of $0.10

Neo Performance Materials Inc. (TSE:NEO) will pay a dividend of $0.10 on the 29th of March. This means the annual payment is 4.0% of the current stock price, which is above the average for the industry.

Check out our latest analysis for Neo Performance Materials

Neo Performance Materials' Dividend Is Well Covered By Earnings

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Neo Performance Materials' earnings easily covered the dividend, but free cash flows were negative. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.

Looking forward, earnings per share is forecast to rise by 39.6% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 36%, which is in the range that makes us comfortable with the sustainability of the dividend.

Neo Performance Materials Is Still Building Its Track Record

It is great to see that Neo Performance Materials has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. The annual payment during the last 5 years was $0.284 in 2018, and the most recent fiscal year payment was $0.29. Dividend payments have grown at less than 1% a year over this period. It's good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn't want to depend on this dividend too heavily.

The Dividend Looks Likely To Grow

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. It's encouraging to see that Neo Performance Materials has been growing its earnings per share at 18% a year over the past five years. Neo Performance Materials definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

An additional note is that the company has been raising capital by issuing stock equal to 11% of shares outstanding in the last 12 months. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

Our Thoughts On Neo Performance Materials' Dividend

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. This company is not in the top tier of income providing stocks.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 2 warning signs for Neo Performance Materials 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 high yield dividend stocks.

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