Linamar Corporation’s (TSE:LNR) investors are due to receive a payment of CA$0.25 per share on 15th of April. This payment means the dividend yield will be 2.0%, which is below the average for the industry.
See our latest analysis for Linamar
The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Before making this announcement, Linamar was easily earning enough to cover the dividend. This means that most of what the business earns is being used to help it grow.
Unless the company can turn things around, EPS could fall by 8.2% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could be 28%, which we are pretty comfortable with and we think is feasible on an earnings basis.
The company has a long dividend track record, but it doesn’t look great with cuts in the past. The dividend has gone from an annual total of CA$0.40 in 2015 to the most recent total annual payment of CA$1.00. This implies that the company grew its distributions at a yearly rate of about 9.6% over that duration. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.
With a relatively unstable dividend, it’s even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. In the last five years, Linamar’s earnings per share has shrunk at approximately 8.2% per annum. A modest decline in earnings isn’t great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed.
In summary, while it’s good to see that the dividend hasn’t been cut, we are a bit cautious about Linamar’s payments, as there could be some issues with sustaining them into the future. The payments haven’t been particularly stable and we don’t see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We don’t think Linamar is a great stock to add to your portfolio if income is your focus.
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. For example, we’ve picked out 3 warning signs for Linamar that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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