3 Canadian Dividend Aristocrats With Dangerously High Payout Ratios

Cineplex Inc. (TSX:CGX) and two other stocks all have dangerously high dividend payout ratios.

| More on:
The Motley Fool

At times, investors can be enamoured by the allure of a high dividend yield. For those living off dividends in retirement, a high yield can be appealing, as it provides greater income. However, not all dividends are created equal, and some companies have dangerously high payout ratios. A high dividend payout ratio as a percentage of earnings may be acceptable in the short term, but it is not sustainable and not a good allocation of funds over the long term. This may lead to a dividend cut, suspension, or cancellation.

Canadian dividend aristocrats are TSX-listed companies that have raised dividends for five consecutive years. Investors attribute a certain level of safety to these companies, as they have demonstrated reliable dividend growth over the long term. Unfortunately, historical patterns are not necessarily a precursor to future success. The three companies below all have payout ratios well above 100% on a trailing 12-month basis. Their situations do not improve when looking forward to next year’s earnings.

One company that has garnered plenty of attention recently is Cineplex Inc. (TSX:CGX). Hollywood has taken its lumps, and the box office has been on a steady decline over the past couple of years. This does not bode well for Canada’s largest film exhibition company. The company’s current payout ratio is a hefty 150%. It is also an unattractive 144% based on 2018 earnings. The company’s dividend has also been eating up the company’s cash flows by a greater percentage each year.

Enercare Inc. (TSX:ECI) is engaged in home services and sub-metering businesses. The company’s current payout ratio is a massive 182%, and although it drops to 124% base on its next 12 months’ earnings, it is still painfully high. The company did raise dividends by 4% in early March, but its dividend-growth rate has been on a downward trajectory over the past year. Its payout ratio as a percentage of earnings before interest, taxes, depreciation, and amortization (EBIDTA) has grown to 104% in 2017 from 94% in 2016, which is further reason for concern.

Last on the list is Parkland Fuel Corp. (TSX:PKI). Parkland’s conundrum is the most interesting of the three. It has a current payout ratio of 340% and 329% based on next year’s earnings. The company’s dividend-growth rates are unspectacular and hover between 2% and 3% over the past five years. Parkland is considered a high-growth company which has been fueled by acquisitions. Herein lies the issue. A high-growth strategy, particular one with high capital expenditures or with high acquisition costs, is at odds with a dividend-growth strategy. As opposed to paying dividends to its shareholders, it should re-invest its funds to offset these costs and sustain its growth strategy.

Bottom line

It’s important for investors to understand the sustainability of a company’s dividend. These aristocrats all have a history of raising dividends, but their high payout ratios are reason for concern. This does not necessarily mean they are bad investments, but investors looking for sustainable dividends may be better off looking elsewhere.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Mat Litalien is long Cineplex.   

More on Dividend Stocks

Female friends enjoying their dessert together at a mall
Dividend Stocks

How I’d Invest $300 a Month to Target a $3,000 Yearly Passive Income

Stocks can be a good source of passive income. All you need is to regularly invest in dividend stocks and…

Read more »

Close up shot of senior couple holding hand. Loving couple sitting together and holding hands. Focus on hands.
Dividend Stocks

These 2 Canadian Dividend Stocks Are a Retiree’s Best Friend

These large-cap Canadian dividend stocks can supplement your income post-retirement.

Read more »

edit Balloon shaped as a heart
Dividend Stocks

4 Top Stocks With High Dividend Growth to Buy in 2023 and Hold Forever

Are you looking for stocks you can buy and forget, while they keep giving you returns? Then these high dividend…

Read more »

money while you sleep
Dividend Stocks

2 “SWAN” Dividend Stocks for Passive Income (AKA “Sleep Well at Night” Stocks)

These SWAN dividend stocks are good buys today for passive income. They would be even better buys on further selloffs,…

Read more »

edit Colleagues chat over ketchup chips
Dividend Stocks

Are You 25 or Younger? Invest Just $75 Per Month for $197K by Retirement

Young investors don't need to invest a lot and don't need risky options. Just this one ETF and $75 each…

Read more »

Family relationship with bond and care
Dividend Stocks

Pensioners: 2 Cheap TSX Dividend Stocks to Buy Now for Passive Income

These top TSX dividend stocks now look oversold.

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Passive Income: How to Make $586 Per Month Tax Free

Creating passive income of this magnitude will take time, but it will be well worth the wait!

Read more »

A golden egg in a nest
Dividend Stocks

Building Your Retirement Nest Egg? These Canadian Dividend Stocks Can Help

These top TSX dividend stocks have made some long-term investors quite rich.

Read more »