Don't Race Out To Buy Pason Systems Inc. (TSE:PSI) Just Because It's Going Ex-Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Pason Systems Inc. (TSE:PSI) is about to go ex-dividend in just 4 days. Ex-dividend means that investors that purchase the stock on or after the 13th of March will not receive this dividend, which will be paid on the 30th of March.

Pason Systems's next dividend payment will be CA$0.19 per share. Last year, in total, the company distributed CA$0.76 to shareholders. Calculating the last year's worth of payments shows that Pason Systems has a trailing yield of 6.2% on the current share price of CA$12.3. If you buy this business for its dividend, you should have an idea of whether Pason Systems's dividend is reliable and sustainable. So we need to investigate whether Pason Systems can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Pason Systems

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Pason Systems paid out 117% 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. A useful secondary check can be to evaluate whether Pason Systems generated enough free cash flow to afford its dividend. Dividends consumed 73% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Pason Systems fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Pason Systems's earnings per share have fallen at approximately 14% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Pason Systems has delivered 12% dividend growth per year on average over the past ten years. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Pason Systems is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Is Pason Systems worth buying for its dividend? Earnings per share have been shrinking in recent times. What's more, Pason Systems is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that being said, if you're still considering Pason Systems as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 1 warning sign for Pason Systems that we recommend you consider before investing in the business.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.