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The board of Headwater Exploration Inc. (TSE:HWX) has announced that it will pay a dividend of CA$0.11 per share on the 15th of July. Based on this payment, the dividend yield on the company's stock will be 7.5%, which is an attractive boost to shareholder returns.
Headwater Exploration's Future Dividend Projections Appear Well Covered By Earnings
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Headwater Exploration was earning enough to cover the previous dividend, but it was paying out quite a large proportion of its free cash flows. The business is earning enough to make the dividend feasible, but the cash payout ratio of 94% indicates it is more focused on returning cash to shareholders than growing the business.
EPS is set to fall by 39.1% over the next 12 months. However, if the dividend continues along recent trends, we estimate the payout ratio could reach 82%, meaning that most of the company's earnings are being paid out to shareholders.
See our latest analysis for Headwater Exploration
Headwater Exploration Doesn't Have A Long Payment History
The dividend has been pretty stable looking back, but the company hasn't been paying one for very long. This makes it tough to judge how it would fare through a full economic cycle. Since 2022, the annual payment back then was CA$0.40, compared to the most recent full-year payment of CA$0.44. This means that it has been growing its distributions at 3.2% per annum over that time. Modest dividend growth is good to see, especially with the payments being relatively stable. However, the payment history is relatively short and we wouldn't want to rely on this dividend too much.
The Dividend Looks Likely To Grow
The company's investors will be pleased to have been receiving dividend income for some time. It's encouraging to see that Headwater Exploration has been growing its earnings per share at 44% a year over the past five years. The company's earnings per share has grown rapidly in recent years, and it has a good balance between reinvesting and paying dividends to shareholders, so we think that Headwater Exploration could prove to be a strong dividend payer.
Our Thoughts On Headwater Exploration's Dividend
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 hasn't been paying a very consistent dividend over time, despite only paying out a small portion of earnings. We don't think Headwater Exploration is a great stock to add to your portfolio if income is your focus.