Algoma Central's (TSE:ALC) Dividend Will Be Increased To CA$0.19

The board of Algoma Central Corporation (TSE:ALC) has announced that it will be paying its dividend of CA$0.19 on the 1st of March, an increased payment from last year's comparable dividend. Despite this raise, the dividend yield of 5.0% is only a modest boost to shareholder returns.

View our latest analysis for Algoma Central

Algoma Central's Dividend Is Well Covered By Earnings

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Before making this announcement, Algoma Central was paying a whopping 138% as a dividend, but this only made up 27% of its overall earnings. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.

If the trend of the last few years continues, EPS will grow by 19.0% over the next 12 months. Assuming the dividend continues along recent trends, we think the payout ratio could be 27% by next year, which is in a pretty sustainable range.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was CA$0.28 in 2014, and the most recent fiscal year payment was CA$0.76. This means that it has been growing its distributions at 11% per annum over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Algoma Central has seen EPS rising for the last five years, at 19% per annum. Growth in EPS bodes well for the dividend, as does the low payout ratio that the company is currently reporting.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Algoma Central's payments are rock solid. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. Overall, we don't think this company has the makings of a good income stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 2 warning signs for Algoma Central that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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