Tree Island Steel (TSE:TSL) Has Announced A Dividend Of CA$0.03

Tree Island Steel Ltd.'s (TSE:TSL) investors are due to receive a payment of CA$0.03 per share on 15th of October. This means the annual payment is 4.7% of the current stock price, which is above the average for the industry.

See our latest analysis for Tree Island Steel

Tree Island Steel's Future Dividends May Potentially Be At Risk

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before this announcement, Tree Island Steel was paying out 254% of what it was earning, and not generating any free cash flows either. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.

Over the next year, EPS could expand by 21.8% if the company continues along the path it has been on recently. If the dividend continues on its recent course, the payout ratio in 12 months could be 223%, which is a bit high and could start applying pressure to the balance sheet.

Tree Island Steel's Dividend Has Lacked Consistency

Tree Island Steel has been paying dividends for a while, but the track record isn't stellar. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2015, the dividend has gone from CA$0.04 total annually to CA$0.12. This means that it has been growing its distributions at 13% per annum over that time. Tree Island Steel 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.

Tree Island Steel Might Find It Hard To Grow Its Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. We are encouraged to see that Tree Island Steel has grown earnings per share at 22% per year over the past five years. Strong earnings is nice to see, but unless this can be sustained on minimal reinvestment of profits, we would question whether dividends will follow suit.

The Dividend Could Prove To Be Unreliable

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 Tree Island Steel has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. This company is not in the top tier of income providing stocks.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 4 warning signs for Tree Island Steel (1 is a bit unpleasant!) that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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