In today’s quest for yield, many investors have forgotten one important thing. If a company doesn’t earn enough to cover a dividend, you can’t count on the payout.
This gets tricky sometimes. A company may have earned enough to afford the dividend for years, only to see earnings fall. Is such a decline a new normal, or just a momentary blip?
It gets much easier to make that decision when a company hasn’t earned enough to cover its dividend for years, which is exactly the position Student Transportation Inc. (TSX:STB)(NASDAQ:STB) finds itself in today.
In 2016, the company posted $6 million U.S. in net profits and a free cash flow of $1 million excluding working capital adjustments. It paid out $37.8 million U.S. in dividends and bought back $26.5 million U.S. worth of shares. It borrowed $70 million U.S. to pay for it.
Results were similar in 2015. Free cash flow was $16 million U.S. (again excluding changes in working capital) while net income was $3.7 million U.S. Total cash dividends were $33.7 million, paid for by issuing $62.9 million U.S. in new shares.
Fiscal 2013 and 2014 also saw the company borrow to afford its generous dividend.
Debt has been steadily climbing over the last few years, too. \
The company’s debt-to-assets ratio was approximately 40% at the end of fiscal 2012. These days it’s over 50%. This suggests the company’s borrowing ability may be hindered going forward.
Of course, there are still plenty of ways the company can continue to maintain its payout. It hasn’t earned enough to cover its dividend in years, yet has been able to keep income investors happy.
