Why It Might Not Make Sense To Buy Birchcliff Energy Ltd. (TSE:BIR) For Its Upcoming Dividend
It looks like Birchcliff Energy Ltd. (TSE:BIR) is about to go ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. 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. Therefore, if you purchase Birchcliff Energy's shares on or after the 15th of December, you won't be eligible to receive the dividend, when it is paid on the 31st of December.
The company's upcoming dividend is CA$0.03 a share, following on from the last 12 months, when the company distributed a total of CA$0.12 per share to shareholders. Calculating the last year's worth of payments shows that Birchcliff Energy has a trailing yield of 1.6% on the current share price of CA$7.52. If you buy this business for its dividend, you should have an idea of whether Birchcliff Energy's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
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. Birchcliff Energy is paying out an acceptable 71% of its profit, a common payout level among most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the past year it paid out 148% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Birchcliff Energy paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Birchcliff Energy to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
See our latest analysis for Birchcliff Energy
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Birchcliff Energy's earnings per share have dropped 8.6% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past nine years, Birchcliff Energy has increased its dividend at approximately 2.0% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.
To Sum It Up
Should investors buy Birchcliff Energy for the upcoming dividend? Birchcliff Energy had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Ever wonder what the future holds for Birchcliff Energy? See what the three analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.