Stock Analysis

West Fraser Timber Co. Ltd. (TSE:WFG) Looks Interesting, And It's About To Pay A Dividend

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TSX:WFG
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It looks like West Fraser Timber Co. Ltd. (TSE:WFG) is about to go ex-dividend in the next 4 days. You will need to purchase shares before the 17th of March to receive the dividend, which will be paid on the 1st of April.

West Fraser Timber's next dividend payment will be CA$0.20 per share, and in the last 12 months, the company paid a total of CA$0.80 per share. Based on the last year's worth of payments, West Fraser Timber has a trailing yield of 1.0% on the current stock price of CA$82.61. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for West Fraser Timber

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. West Fraser Timber has a low and conservative payout ratio of just 7.1% of its income after tax. A useful secondary check can be to evaluate whether West Fraser Timber generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 5.2% of its cash flow last year.

It's positive to see that West Fraser Timber's 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.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
TSX:WFG Historic Dividend March 12th 2021

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see West Fraser Timber has grown its earnings rapidly, up 55% a year for the past five years. With earnings per share growing rapidly and the company sensibly reinvesting almost all of its profits within the business, West Fraser Timber looks like a promising growth company.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. West Fraser Timber has delivered an average of 30% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

To Sum It Up

Has West Fraser Timber got what it takes to maintain its dividend payments? We love that West Fraser Timber is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. There's a lot to like about West Fraser Timber, and we would prioritise taking a closer look at it.

While it's tempting to invest in West Fraser Timber for the dividends alone, you should always be mindful of the risks involved. In terms of investment risks, we've identified 1 warning sign with West Fraser Timber and understanding them should be part of your investment process.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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