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Yellow Pages Limited (TSE:Y) stock is about to trade ex-dividend in four days. This means that investors who purchase shares on or after the 27th of August will not receive the dividend, which will be paid on the 15th of September.
Yellow Pages's upcoming dividend is CA$0.11 a share, following on from the last 12 months, when the company distributed a total of CA$0.44 per share to shareholders. Calculating the last year's worth of payments shows that Yellow Pages has a trailing yield of 3.9% on the current share price of CA$11.4. If you buy this business for its dividend, you should have an idea of whether Yellow Pages's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
Check out our latest analysis for Yellow Pages
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Yellow Pages paid out just 5.7% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. A useful secondary check can be to evaluate whether Yellow Pages generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 2.2% of its cash flow last year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
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 Yellow Pages's earnings per share have dropped 11% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Given that Yellow Pages has only been paying a dividend for a year, there's not much of a past history to draw insight from.
To Sum It Up
Has Yellow Pages got what it takes to maintain its dividend payments? Earnings per share are down meaningfully, 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 needs to be cut. To summarise, Yellow Pages looks okay on this analysis, although it doesn't appear a stand-out opportunity.