As investors looking to find the best Canadian dividend stocks to own, we should consistently be on the defense. It's easy to build a portfolio of strong income payers, but the harsh reality is a single poor decision can lead to underperformance for an entire portfolio.
Issues with a company's dividend will likely lead to a significant decline in share price and an inevitable capital loss. So in this article we're going to take a look at two Canadian dividend options that are showing signs of potential dividend issues either through high payout ratios, or slowing dividend growth.
Decelerating growth for Saputo (TSX:SAP)
Saputo (TSE:SAP) is a Canadian company, but a global diary producer. In fact, the company generates much more of its sales from the United States (46%) than it does Canada (26%). The company also has operations in the United Kingdom and other international countries.
As a maker of cheese, milk, cream and other products, the company is a consumer defensive stock. Revenue tends to be consistent regardless of economic conditions. But, the one red flag for income investors should be that both revenue and dividend growth have been somewhat flatlining.
Prior to 2018, Saputo had put up an impressive streak of growth. The company had grown the bottom line in 6 of 7 years and revenue had grown from $6.9B in 2012 to $11.16B to close out 2017.
However, it's becoming clear that the company's growth is currently stalling, with earnings declining in 3 of the 4 most recent fiscal years and free cash flow generation becoming somewhat stagnant.
This is starting to impact the dividend as well. From 2012 to 2018 the company had grown its dividend by 68%. From 2018 to present day, the company's dividend has grown by a meager 9%. In fact, its most recent dividend raise of 2.96% hardly keeps up with inflation in our current environment.
Is Saputo at risk of a dividend cut? I'd say no. The company's dividend makes up only 47% of earnings and just under 70% of free cash flow. It also has one of the longest dividend growth streaks in the country at 23 straight years.
But there is no question that the company is currently in a rut due to supply chain issues, which has been piled on top of operational issues over the last 3-4 years. I believe there are better income options for Canadians looking at buying stocks right now. Some analysts seem to agree, cutting their price targets for Saputo back in late September.
Before I'd considering buying Saputo, I'd like to see somewhat of a return to steady growth.
NFI Group (TSX:NFI) reaching uncomfortable payout ratio in terms of earnings
NFI Group's (TSE:NFI) struggles have been well documented over the last few years. COVID-19 had a detrimental impact on the company as factories were forced to shut down and pandemic measures were put in place.
NFI Group, or as the company used to be called, New Flyer Industries, is a manufacturer of transit busses and motor coaches.
Manufacturing represents a little more than half of the company's revenue, while its aftermarket solutions include spare parts and servicing related to its transit buses and motor coaches.
Although the company is Canadian, most of the fabrication, manufacturing, distribution, and servicing of its products takes place in the United States. As a result, it derives most of its revenue from the US.
The key catalyst from the company as of late has been its mission to provide emission free busses, adding to the green movement in light of climate change.
Its share price recently took a hit off a poor quarterly report in which the company slashed Fiscal 2021 guidance. Cutting guidance is never a good thing for either the dividend or the share price, as the market will often adjust valuations based on future growth and the safety of the dividend.
Now, NFI Group has come out and stated that the dividend will be maintained throughout this difficult environment. But considering this is a company that just slashed its dividend 17 months ago during the heat of the pandemic, we need to take everything here with a grain of salt.
Analysts estimate the company will have a breakeven year in Fiscal 2021 before returning to profitability in 2022 with earnings of $1.05. The company currently pays a $0.85 dividend. This puts NFI Group's payout ratio in terms of earnings in what I would deem the "uncomfortable" range over the next couple of years.
Fiscal 2022 estimates are for earnings in excess of $2 a share, which is a bottom line that more than covers its current dividend. But the issue is these estimates are multiple years out, in an operating environment that seems to be able to change on a dime.
I think management will do whatever they have to to maintain the current dividend, as two cuts in two years would be a significant blow for NFI Group. But, I just don't trust the dividend in this environment, and if I was looking for income, I'd be looking elsewhere.
Next, lets take a look at some details on Canadian Dividend All-stars.