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Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Domtar Corporation (NYSE:UFS) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 1st of July, you won’t be eligible to receive this dividend, when it is paid on the 16th of July.
Domtar’s next dividend payment will be US$0.46 per share, on the back of last year when the company paid a total of US$1.82 to shareholders. Last year’s total dividend payments show that Domtar has a trailing yield of 4.2% on the current share price of $43.15. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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. Domtar paid out a comfortable 36% of its profit last year. A useful secondary check can be to evaluate whether Domtar generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 36% of the free cash flow it generated, which is a comfortable payout ratio.
It’s positive to see that Domtar’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.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. It’s encouraging to see Domtar has grown its earnings rapidly, up 29% a year for the past five years.
Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Domtar has delivered 15% dividend growth per year on average over the past 9 years. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
To Sum It Up
Is Domtar an attractive dividend stock, or better left on the shelf? It’s great that Domtar is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It’s disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. There’s a lot to like about Domtar, and we would prioritise taking a closer look at it.
Curious what other investors think of Domtar? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .
We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.