Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Linamar Corporation (TSE:LNR) is about to go ex-dividend in just 3 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company’s books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase Linamar’s shares before the 21st of November in order to receive the dividend, which the company will pay on the 2nd of December.
The company’s next dividend payment will be CA$0.20 per share, and in the last 12 months, the company paid a total of CA$0.80 per share. Based on the last year’s worth of payments, Linamar has a trailing yield of 1.2% on the current stock price of CA$64.59. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
See our latest analysis for Linamar
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Linamar is paying out just 13% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether Linamar generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 42% of the free cash flow it generated, which is a comfortable payout ratio.
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.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. So we’re not too excited that Linamar’s earnings are down 5.0% a year over the past five years.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Linamar has delivered 9.6% dividend growth per year on average over the past 10 years.
To Sum It Up
From a dividend perspective, should investors buy or avoid Linamar? Linamar has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. In summary, while it has some positive characteristics, we’re not inclined to race out and buy Linamar today.
So while Linamar looks good from a dividend perspective, it’s always worthwhile being up to date with the risks involved in this stock. We’ve identified 2 warning signs with Linamar (at least 1 which is concerning), and understanding them should be part of your investment process.
If you’re in the market for strong dividend payers, we recommend checking our selection of top 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.
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