Don't Buy Tree Island Steel Ltd. (TSE:TSL) For Its Next Dividend Without Doing These Checks

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Tree Island Steel Ltd. (TSE:TSL) is about to trade ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Accordingly, Tree Island Steel investors that purchase the stock on or after the 28th of June will not receive the dividend, which will be paid on the 15th of July.

The company's next dividend payment will be CA$0.03 per share, on the back of last year when the company paid a total of CA$0.22 to shareholders. Based on the last year's worth of payments, Tree Island Steel stock has a trailing yield of around 4.7% on the current share price of CA$3.01. If you buy this business for its dividend, you should have an idea of whether Tree Island Steel's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Tree Island Steel

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. Tree Island Steel distributed an unsustainably high 142% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. Dividends consumed 58% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's good to see that while Tree Island Steel's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Tree Island Steel paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That explains why we're not overly excited about Tree Island Steel's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past nine years, Tree Island Steel has increased its dividend at approximately 15% a year on average.

The Bottom Line

Is Tree Island Steel an attractive dividend stock, or better left on the shelf? Earnings per share have barely moved in recent times, and the company is paying out an uncomfortably high percentage of its income. Fortunately its cash generation was somewhat stronger. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that being said, if you're still considering Tree Island Steel as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 4 warning signs for Tree Island Steel and you should be aware of these before buying any shares.

A common investing mistake is buying the first interesting stock you see. Here you can find a full 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com