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

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

3 CRA Benefits Most Canadians Can Grab in 2024

You can save on taxes by claiming the dividend tax credit on Fortis Inc (TSX:FTS) shares.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »