The board of Caribbean Utilities Company, Ltd. (TSE:CUP.U) has announced that it will pay a dividend of $0.185 per share on the 14th of March. Based on this payment, the dividend yield on the company’s stock will be 5.6%, which is an attractive boost to shareholder returns.
See our latest analysis for Caribbean Utilities Company
We like to see robust dividend yields, but that doesn’t matter if the payment isn’t sustainable. Before making this announcement, Caribbean Utilities Company was earning enough to cover the dividend, but it wasn’t generating any free cash flows. Since a dividend means the company is paying out cash to investors, this could prove to be a problem in the future.
The next year is set to see EPS grow by 4.7%. If the dividend continues along recent trends, we estimate the payout ratio will be 72%, which is in the range that makes us comfortable with the sustainability of the dividend.
The dividend’s track record has been pretty solid, but with only 7 years of history we want to see a few more years of history before making any solid conclusions. The dividend has gone from an annual total of $0.68 in 2018 to the most recent total annual payment of $0.74. This implies that the company grew its distributions at a yearly rate of about 1.2% over that duration. It’s good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn’t want to depend on this dividend too heavily.
Investors could be attracted to the stock based on the quality of its payment history. However, Caribbean Utilities Company has only grown its earnings per share at 3.2% per annum over the past five years. Caribbean Utilities Company is struggling to find viable investments, so it is returning more to shareholders. This isn’t bad in itself, but unless earnings growth pick up we wouldn’t expect dividends to grow either.
We should note that Caribbean Utilities Company has issued stock equal to 11% of shares outstanding. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus – perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
In summary, while it’s good to see that the dividend hasn’t been cut, we are a bit cautious about Caribbean Utilities Company’s payments, as there could be some issues with sustaining them into the future. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would be a touch cautious of relying on this stock primarily for the dividend income.