We Wouldn't Be Too Quick To Buy South Bow Corporation (TSE:SOBO) Before It Goes Ex-Dividend

Readers hoping to buy South Bow Corporation (TSE:SOBO) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Therefore, if you purchase South Bow's shares on or after the 31st of December, you won't be eligible to receive the dividend, when it is paid on the 15th of January.

The company's next dividend payment will be US$0.50 per share, on the back of last year when the company paid a total of US$2.00 to shareholders. Based on the last year's worth of payments, South Bow stock has a trailing yield of around 7.1% on the current share price of CA$38.79. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. South Bow distributed an unsustainably high 125% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. South Bow paid out more free cash flow than it generated - 126%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Cash is slightly more important than profit from a dividend perspective, but given South Bow's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

View our latest analysis for South Bow

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. As a result, it's definitely disappointing to see that earnings per share have declined 5.6% over the past year.

Given that South Bow has only been paying a dividend for a year, there's not much of a past history to draw insight from.

To Sum It Up

From a dividend perspective, should investors buy or avoid South Bow? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (125%) and cash flow as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of South Bow don't faze you, it's worth being mindful of the risks involved with this business. Case in point: We've spotted 2 warning signs for South Bow you should be aware of.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.