Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Yellow Pages Limited (TSE:Y) is about to trade ex-dividend in the next four days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Yellow Pages' shares on or after the 25th of November will not receive the dividend, which will be paid on the 15th of December.
The company's next dividend payment will be CA$0.15 per share. Last year, in total, the company distributed CA$0.60 to shareholders. Based on the last year's worth of payments, Yellow Pages stock has a trailing yield of around 4.2% on the current share price of CA$14.4. 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.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Fortunately Yellow Pages's payout ratio is modest, at just 30% of profit. A useful secondary check can be to evaluate whether Yellow Pages 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 13% of its cash flow last year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Yellow Pages's 5.1% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last two years, Yellow Pages has lifted its dividend by approximately 17% a year on average.
To Sum It Up
Is Yellow Pages an attractive dividend stock, or better left on the shelf? Yellow Pages has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. All things considered, we are not particularly enthused about Yellow Pages from a dividend perspective.
While it's tempting to invest in Yellow Pages for the dividends alone, you should always be mindful of the risks involved. Our analysis shows 2 warning signs for Yellow Pages and you should be aware of these before buying any shares.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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.
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