How Does Westshore Terminals Investment Corporation (TSE:WTE) Fare As A Dividend Stock?

Today we'll take a closer look at Westshore Terminals Investment Corporation (TSE:WTE) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

In this case, Westshore Terminals Investment likely looks attractive to investors, given its 3.8% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. During the year, the company also conducted a buyback equivalent to around 4.0% of its market capitalisation. Some simple research can reduce the risk of buying Westshore Terminals Investment for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Westshore Terminals Investment!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, Westshore Terminals Investment paid out 32% of its profit as dividends. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase the payout ratio over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Westshore Terminals Investment's cash payout ratio in the last year was 26%, which suggests dividends were well covered by cash generated by the business. 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.

With a strong net cash balance, Westshore Terminals Investment investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of Westshore Terminals Investment's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Westshore Terminals Investment's dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was CA$1.2 in 2010, compared to CA$0.6 last year. This works out to be a decline of approximately 6.4% per year over that time. Westshore Terminals Investment's dividend has been cut sharply at least once, so it hasn't fallen by 6.4% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying Westshore Terminals Investment for its dividend, given that payments have shrunk over the past 10 years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Earnings have grown at around 2.9% a year for the past five years, which is better than seeing them shrink! A payout ratio below 50% leaves ample room to reinvest in the business, and provides finanical flexibility. However, earnings per share are unfortunately not growing much. Might this suggest that the company should pay a higher dividend instead?

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. It's great to see that Westshore Terminals Investment is paying out a low percentage of its earnings and cash flow. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. Overall we think Westshore Terminals Investment is an interesting dividend stock, although it could be better.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 2 warning signs for Westshore Terminals Investment (1 makes us a bit uncomfortable!) that you should be aware of before investing.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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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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