Be Sure To Check Out Canadian Tire Corporation, Limited (TSE:CTC.A) Before It Goes Ex-Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Canadian Tire Corporation, Limited (TSE:CTC.A) is about to go ex-dividend in just four days. You can purchase shares before the 28th of January in order to receive the dividend, which the company will pay on the 1st of March.

Canadian Tire Corporation's upcoming dividend is CA$1.18 a share, following on from the last 12 months, when the company distributed a total of CA$4.70 per share to shareholders. Looking at the last 12 months of distributions, Canadian Tire Corporation has a trailing yield of approximately 2.8% on its current stock price of CA$170.88. If you buy this business for its dividend, you should have an idea of whether Canadian Tire Corporation's dividend is reliable and sustainable. So we need to investigate whether Canadian Tire Corporation can afford its dividend, and if the dividend could grow.

See our latest analysis for Canadian Tire Corporation

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Canadian Tire Corporation's payout ratio is modest, at just 47% of profit. A useful secondary check can be to evaluate whether Canadian Tire Corporation generated enough free cash flow to afford its dividend. It paid out 11% of its free cash flow as dividends last year, which is conservatively low.

It's positive to see that Canadian Tire Corporation'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.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Canadian Tire Corporation, with earnings per share up 5.0% on average over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Canadian Tire Corporation has lifted its dividend by approximately 19% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Is Canadian Tire Corporation worth buying for its dividend? Earnings per share have been growing moderately, and Canadian Tire Corporation is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Canadian Tire Corporation is halfway there. Overall we think this is an attractive combination and worthy of further research.

So while Canadian Tire Corporation looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example, we've found 1 warning sign for Canadian Tire Corporation that we recommend you consider before investing in the business.

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.

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This article by Simply Wall St is general in nature. 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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