Cogent Communications Holdings' (NASDAQ:CCOI) Upcoming Dividend Will Be Larger Than Last Year's

Cogent Communications Holdings, Inc.'s (NASDAQ:CCOI) dividend will be increasing to US$0.85 on 25th of March. Despite this raise, the dividend yield of 5.1% is only a modest boost to shareholder returns.

Check out our latest analysis for Cogent Communications Holdings

Cogent Communications Holdings Is Paying Out More Than It Is Earning

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Before making this announcement, the company's dividend was much higher than its earnings. It will be difficult to sustain this level of payout so we wouldn't be confident about this continuing.

EPS is set to fall by 7.0% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio could reach over 200%, which could put the dividend in jeopardy if the company's earnings don't improve.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from US$0.40 in 2012 to the most recent annual payment of US$3.42. This implies that the company grew its distributions at a yearly rate of about 24% over that duration. Cogent Communications Holdings has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

Dividend Growth Could Be Constrained

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. We are encouraged to see that Cogent Communications Holdings has grown earnings per share at 25% per year over the past five years. EPS has been growing well, but Cogent Communications Holdings has been paying out a massive proportion of its earnings, which can make the dividend tough to maintain.

Cogent Communications Holdings' Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Cogent Communications Holdings' payments are rock solid. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. This company is not in the top tier of income providing stocks.

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. To that end, Cogent Communications Holdings has 4 warning signs (and 3 which can't be ignored) we think you should know about. 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.