In a recent announcement, Stelco Holdings Inc. (TSE:STLC) declared a dividend of CA$3.42 per share, scheduled for payment on November 28. This generous dividend equates to 4.0% of the company's current stock price, surpassing the industry average. However, there are growing concerns about the sustainability of this payout due to Stelco's negative cash flows, despite earnings currently covering the dividend.
Looking ahead, Stelco's earnings per share (EPS) are projected to increase by 12.7% in the next fiscal year. Yet, there is a looming financial risk if the payout ratio, which is anticipated to reach 162%, continues its upward trajectory based on recent patterns. This could potentially place significant financial strain on the firm.
Stelco's dividend track record over the past six years has been marked by volatility. The annual dividend has climbed from CA$0.40 in 2017 to CA$1.68, translating to a compound annual growth rate (CAGR) of approximately 27%. In contrast, the company has seen its EPS shrink by an average of 31% annually over the last five years. This decline in earnings could constrain future dividends unless the trend is reversed. Nonetheless, there is some optimism with the expected earnings rise next year.
Despite these challenges, Stelco has not reduced its dividends to date. Even so, the inconsistency in past payments combined with current negative cash flows raises red flags regarding long-term sustainability. Consequently, investors seeking steady income might exercise caution when considering Stelco Holdings as an investment option.
InvestingPro Insights
In light of the recent dividend announcement by Stelco Holdings Inc., it's crucial to consider several key metrics and insights provided by InvestingPro. The company's management has been actively buying back shares, which could be a sign of confidence in the company's prospects (InvestingPro Tip 0). However, the company's low earnings quality, with free cash flow trailing net income, could be a cause for concern (InvestingPro Tip 7).
From a financial standpoint, Stelco's market capitalization stands at $1694.65M with a P/E ratio of 10.64, indicating that the shares may be undervalued compared to the earnings the company generates (InvestingPro Data). The company's return on assets for the last twelve months as of Q3 2023 is 5.7%, suggesting a relatively efficient use of its assets to generate earnings (InvestingPro Data).
Moreover, Stelco's dividend yield as of the end of 2023 was 3.98%, slightly below the recently declared dividend yield of 4.0% (InvestingPro Data). This discrepancy might be due to the company's negative cash flows, as indicated in the article.
As a final note, InvestingPro offers a wealth of additional tips and data on Stelco Holdings Inc. and other companies. For instance, there are 14 more InvestingPro Tips for Stelco that could provide valuable insights for potential investors. The right information can help investors make informed decisions and potentially increase their returns.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.