It Might Not Be A Great Idea To Buy C-Com Satellite Systems Inc. (CVE:CMI) For Its Next Dividend

By
Simply Wall St
Published
July 26, 2021
TSXV:CMI
Source: Shutterstock

It looks like C-Com Satellite Systems Inc. (CVE:CMI) is about to go ex-dividend in the next three days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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. In other words, investors can purchase C-Com Satellite Systems' shares before the 30th of July in order to be eligible for the dividend, which will be paid on the 17th of August.

The company's next dividend payment will be CA$0.013 per share. Last year, in total, the company distributed CA$0.05 to shareholders. Based on the last year's worth of payments, C-Com Satellite Systems stock has a trailing yield of around 1.6% on the current share price of CA$3.1. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for C-Com Satellite Systems

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. Last year, C-Com Satellite Systems paid out 109% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. C-Com Satellite Systems paid out more free cash flow than it generated - 148%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

C-Com Satellite Systems does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

As C-Com Satellite Systems's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see how much of its profit C-Com Satellite Systems paid out over the last 12 months.

historic-dividend
TSXV:CMI Historic Dividend July 26th 2021

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. It's not encouraging to see that C-Com Satellite Systems's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Minimal earnings growth, combined with concerningly high payout ratios suggests that C-Com Satellite Systems is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. C-Com Satellite Systems has delivered an average of 5.8% per year annual increase in its dividend, based on the past nine years of dividend payments.

To Sum It Up

Is C-Com Satellite Systems worth buying for its dividend? Earnings per share are effectively flat, plus C-Com Satellite Systems's dividend is not well covered by either earnings or cash flow, which is not great. Bottom line: C-Com Satellite Systems has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of C-Com Satellite Systems don't faze you, it's worth being mindful of the risks involved with this business. In terms of investment risks, we've identified 4 warning signs with C-Com Satellite Systems and understanding them should be part of your investment process.

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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Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.