Sleep Country Canada Holdings (TSE:ZZZ) Is Paying Out A Larger Dividend Than Last Year

Sleep Country Canada Holdings Inc.'s (TSE:ZZZ) dividend will be increasing to CA$0.21 on 30th of May. Based on the announced payment, the dividend yield for the company will be 3.1%, which is fairly typical for the industry.

See our latest analysis for Sleep Country Canada Holdings

Sleep Country Canada Holdings' Payment Has Solid Earnings Coverage

Unless the payments are sustainable, the dividend yield doesn't mean too much. However, prior to this announcement, Sleep Country Canada Holdings' dividend was comfortably covered by both cash flow and earnings. This means that most of its earnings are being retained to grow the business.

Over the next year, EPS could expand by 13.8% if recent trends continue. If the dividend continues along recent trends, we estimate the payout ratio will be 28%, which is in the range that makes us comfortable with the sustainability of the dividend.

Sleep Country Canada Holdings' Dividend Has Lacked Consistency

Looking back, Sleep Country Canada Holdings' dividend hasn't been particularly consistent. This makes us cautious about the consistency of the dividend over a full economic cycle. The first annual payment during the last 7 years was CA$0.52 in 2015, and the most recent fiscal year payment was CA$0.86. This implies that the company grew its distributions at a yearly rate of about 7.5% over that duration. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see Sleep Country Canada Holdings has been growing its earnings per share at 14% a year over the past five years. With a decent amount of growth and a low payout ratio, we think this bodes well for Sleep Country Canada Holdings' prospects of growing its dividend payments in the future.

Sleep Country Canada Holdings Looks Like A Great Dividend Stock

In summary, it is always positive to see the dividend being increased, and we are particularly pleased with its overall sustainability. Earnings are easily covering distributions, and the company is generating plenty of cash. All of these factors considered, we think this has solid potential as a dividend stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 2 warning signs for Sleep Country Canada Holdings that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated 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.