Stelco Holdings (TSE:STLC) Has Announced A Dividend Of CA$3.42

The board of Stelco Holdings Inc. (TSE:STLC) has announced that it will pay a dividend of CA$3.42 per share on the 28th of November. The dividend yield will be 4.0% based on this payment which is still above the industry average.

View our latest analysis for Stelco Holdings

Stelco Holdings Is Paying Out More Than It Is Earning

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Stelco Holdings' earnings easily covered the dividend, but free cash flows were negative. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

Earnings per share is forecast to rise by 12.7% over the next year. If the dividend continues on its recent course, the payout ratio in 12 months could be 162%, which is a bit high and could start applying pressure to the balance sheet.

Stelco Holdings' Dividend Has Lacked Consistency

Looking back, Stelco Holdings' dividend hasn't been particularly consistent. This suggests that the dividend might not be the most reliable. Since 2017, the dividend has gone from CA$0.40 total annually to CA$1.68. This means that it has been growing its distributions at 27% per annum over that time. Stelco Holdings has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Has Limited Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Stelco Holdings' earnings per share has shrunk at 31% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

Stelco Holdings' Dividend Doesn't Look Sustainable

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. 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. To that end, Stelco Holdings has 3 warning signs (and 1 which makes us a bit uncomfortable) we think 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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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.