Stock Analysis

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

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NasdaqGS:CCOI
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Cogent Communications Holdings, Inc. (NASDAQ:CCOI) has announced that it will be increasing its dividend on the 27th of May to US$0.88. The announced payment will take the dividend yield to 5.6%, which is in line with the average for the industry.

View our latest analysis for Cogent Communications Holdings

Cogent Communications Holdings Is Paying Out More Than It Is Earning

Solid dividend yields are great, but they only really help us if the payment is sustainable. Based on the last payment, the company wasn't making enough to cover what it was paying to shareholders. Without profits and cash flows increasing, it would be difficult for the company to continue paying the dividend at this level.

The next 12 months is set to see EPS grow by 58.8%. Assuming the dividend continues along recent trends, we think the payout ratio could get very high, which probably can't continue without starting to put some pressure on the balance sheet.

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NasdaqGS:CCOI Historic Dividend May 3rd 2022

Dividend Volatility

The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. Since 2012, the first annual payment was US$0.40, compared to the most recent full-year payment of US$3.52. This works out to be a compound annual growth rate (CAGR) of approximately 24% a year over that time. 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.

Cogent Communications Holdings' Dividend Might Lack Growth

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 13% per year over the past five years. While EPS is growing at a decent rate, but future growth could be limited by the amount of earnings being paid out to shareholders.

Cogent Communications Holdings' Dividend Doesn't Look Sustainable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. Strong earnings growth means Cogent Communications Holdings has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. 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. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Cogent Communications Holdings has 4 warning signs (and 3 which are concerning) we think you should know about. Is Cogent Communications Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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