Don’t Buy Linamar Corporation (TSE:LNR) For Its Next Dividend Without Doing These Checks

It looks like Linamar Corporation (TSE:LNR) is about to go ex-dividend in the next 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company’s books to be eligible for a dividend payment. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase Linamar’s shares before the 30th of March in order to be eligible for the dividend, which will be paid on the 18th of April.

The company’s next dividend payment will be CA$0.22 per share, on the back of last year when the company paid a total of CA$0.80 to shareholders. Based on the last year’s worth of payments, Linamar stock has a trailing yield of around 1.4% on the current share price of CA$61.91. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! As a result, readers should always check whether Linamar has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Linamar

If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Linamar has a low and conservative payout ratio of just 12% of its income after tax. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Linamar paid out more free cash flow than it generated – 114%, to be precise – last year, which we think is concerningly high. It’s hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we’d wonder how the company justifies this payout level.

While Linamar’s dividends were covered by the company’s reported profits, cash is somewhat more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Linamar’s ability to maintain its dividend.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

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Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. So we’re not too excited that Linamar’s earnings are down 3.8% a year over the past five years.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Linamar has lifted its dividend by approximately 11% a year on average.

Final Takeaway

Is Linamar an attractive dividend stock, or better left on the shelf? It’s disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though Linamar is paying out less than half its income as dividends. However, it’s also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. It’s not that we think Linamar is a bad company, but these characteristics don’t generally lead to outstanding dividend performance.

With that being said, if you’re still considering Linamar as an investment, you’ll find it beneficial to know what risks this stock is facing. Our analysis shows 2 warning signs for Linamar that we strongly recommend you have a look at before investing in the company.

If you’re in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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