Linamar Corporation’s (TSE:LNR) investors are due to receive a payment of CA$0.25 per share on 15th of April. This means the annual payment will be 1.9% of the current stock price, which is lower than the industry average.
The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. However, prior to this announcement, Linamar’s dividend was comfortably covered by both cash flow and earnings. This means that most of its earnings are being retained to grow the business.
Looking forward, EPS could fall by 8.2% if the company can’t turn things around from the last few years. 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.
Check out our latest analysis for Linamar
Although the company has a long dividend history, it has been cut at least once in the last 10 years. 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. It’s good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Linamar might have put its house in order since then, but we remain cautious.
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Over the past five years, it looks as though Linamar’s EPS has declined at around 8.2% a year. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely – the opposite of dividend growth.
Overall, it’s nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn’t been great. We would probably look elsewhere for an income investment.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we’ve picked out 3 warning signs for Linamar that investors should take into consideration. Is Linamar not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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