Fiera Capital (TSX:FSZ) presents an intriguing option for dividend-focused investors, particularly with its eye-catching yield of approximately 10% at writing. At first glance, this is a compelling figure, especially in a market environment where income-oriented stocks are highly sought after. But before diving in, it’s essential to examine the stock, including sustainability of its dividend and the broader context of the company’s financial performance, past trends, and future outlook.
The numbers
The dividend yield itself is based on a trailing 12-month payout of $0.86 per share. A yield in this range is undoubtedly appealing for those looking to generate passive income. It significantly outpaces the yields offered by many comparable dividend-paying stocks on the TSX. However, a closer look reveals that Fiera stock’s payout ratio is 141.3%. This means the company is distributing more in dividends than it earns in net income. And this raises questions about the long-term sustainability of its payouts. When payout ratios exceed 100%, it often signals a need to rely on reserves, debt, or asset sales to maintain dividends. None of which are ideal for long-term health.
Recent earnings data offer some positive insights into Fiera stock’s operational momentum. For the third quarter of 2024, the company reported total revenues of $172 million, an 8% increase year-over-year. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), a measure of profitability before certain accounting adjustments, grew even more impressively, rising 18% to $51.7 million. Notably, quarterly earnings growth (year-over-year) was reported at 14.2%, reinforcing the notion that the company has seen some financial improvements in recent periods.
Nevertheless, the elevated payout ratio and company’s reliance on maintaining such a high dividend yield introduce risks. Over the last five years, Fiera Capital’s average dividend yield has hovered around the 10% mark. This suggests the company has been consistent in delivering high payouts to shareholders. However, it’s important to note that high-yield dividends can sometimes act as a double-edged sword. While they attract income-focused investors, they may also signal that the market views the stock as riskier, thereby depressing the share price.
Future considerations
On the balance sheet front, Fiera carries a significant amount of debt, currently reported at $759.9 million in its most recent quarter. The debt-to-equity ratio of 257.7% highlights the leverage the company has undertaken, which is considerably high. On the positive side, cash flow metrics are decent. It holds operating cash flow at $139.7 million and levered free cash flow at $99.8 million over the trailing 12 months. These figures indicate that Fiera is still generating the liquidity needed to manage its obligations and fund its dividend payouts. For now.
From a valuation perspective, Fiera Capital appears to trade at a relatively low forward price-to-earnings (P/E) ratio of 7.8, compared to its trailing P/E of 15.8. This suggests the market anticipates earnings growth, which could support the company’s ability to sustain or grow its dividend in the future.
While the stock’s beta of 1.6 indicates that it may be more volatile than the broader market, this could work in favour of investors who are willing to endure short-term price swings for the sake of high yields. Furthermore, the current share price trades at a discount to its 52-week high of $10.92. This may offer an attractive entry point for those optimistic about the company’s ability to effectively manage its financials.
Foolish takeaway
Looking ahead, Fiera stock’s ability to maintain its high dividend yield will depend on several factors. These include its success in continuing to grow earnings, effectively managing debt, and aligning payout ratios more closely with net income. The company has a solid track record of delivering on dividends. Yet the elevated payout ratio suggests this may not be sustainable indefinitely without further growth or strategic adjustments. Investors should watch for updates on debt reduction efforts, earnings guidance, and any changes to the dividend policy in upcoming quarterly results.
