It Might Not Be A Great Idea To Buy Pason Systems Inc. (TSE:PSI) For Its Next Dividend

It Might Not Be A Great Idea To Buy Pason Systems Inc. (TSE:PSI) For Its Next Dividend

Pason Systems Inc. (TSE:PSI) stock is about to trade ex-dividend in 4 days. If you purchase the stock on or after the 15th of September, you won’t be eligible to receive this dividend, when it is paid on the 30th of September.

Pason Systems’s next dividend payment will be CA$0.05 per share. Last year, in total, the company distributed CA$0.20 to shareholders. Based on the last year’s worth of payments, Pason Systems stock has a trailing yield of around 3.7% on the current share price of CA$5.36. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! So we need to investigate whether Pason Systems can afford its dividend, and if the dividend could grow.

View our latest analysis for Pason Systems

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Pason Systems paid out 168% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Dividends consumed 61% of the company’s free cash flow last year, which is within a normal range for most dividend-paying organisations.

It’s good to see that while Pason Systems’s dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we’d be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we’re discomforted by Pason Systems’s 20% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Pason Systems has seen its dividend decline 3.3% per annum on average over the past 10 years, which is not great to see. It’s never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company’s health in an attempt to maintain it.

The Bottom Line

From a dividend perspective, should investors buy or avoid Pason Systems? Earnings per share have been in decline, which is not encouraging. Additionally, Pason Systems is paying out quite a high percentage of its earnings, and more than half its cash flow, so it’s hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It’s not the most attractive proposition from a dividend perspective, and we’d probably give this one a miss for now.

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