It looks like Linamar Corporation (TSE:LNR) is about to go ex-dividend in the next 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company’s books in order to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company’s books on the record date. Meaning, you will need to purchase Linamar’s shares before the 21st of August to receive the dividend, which will be paid on the 8th of September.
The company’s upcoming dividend is CA$0.22 a share, following on from the last 12 months, when the company distributed a total of CA$0.88 per share to shareholders. Calculating the last year’s worth of payments shows that Linamar has a trailing yield of 1.3% on the current share price of CA$69.59. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Linamar has been able to grow its dividends, or if the dividend might be cut.
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 has a low and conservative payout ratio of just 5.5% of its income after tax. A useful secondary check can be to evaluate whether Linamar generated enough free cash flow to afford its dividend. It distributed 34% of its free cash flow as dividends, a comfortable payout level for most companies.
It’s positive to see that Linamar’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.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It’s not encouraging to see that Linamar’s earnings are effectively flat over the past five years. We’d take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.
Linamar also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It’s hard to grow dividends per share when a company keeps creating new shares.
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.
To Sum It Up
From a dividend perspective, should investors buy or avoid Linamar? Earnings per share have been flat, although at least the company is paying out a low and conservative percentage of both its earnings and cash flow. It’s definitely not great to see earnings falling, but at least there may be some buffer before the dividend gets cut. In summary, while it has some positive characteristics, we’re not inclined to race out and buy Linamar today.
While it’s tempting to invest in Linamar for the dividends alone, you should always be mindful of the risks involved. For example – Linamar has 1 warning sign we think you should be aware of.
Generally, we wouldn’t recommend just buying the first dividend stock you see. Here’s a curated list of interesting stocks that are strong dividend payers.
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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.