I have held Capital Power Corp. CPX for several years. With a current dividend yield of more than 5 per cent and steady capital growth, it has so far been a good choice for my dividend portfolio. But it has an extraordinarily high payout ratio of 543 per cent. Does it make sense to hold it expecting the dividend to be sustainable?
I’ve said it before and I’ll say it again: If you’re trying to determine the sustainability of a company’s dividend, don’t rely on the payout ratios published on financial websites. These are typically computer-generated numbers that provide no context or information as to how they were calculated. As a result, they often paint a misleading picture of a company’s ability to maintain its dividend.
Capital Power is a case in point. I’ve seen the same bloated payout ratio figure on several different websites; it appears to have been calculated by dividing the company’s total dividends of $2.12 over the past 12 months by its 2021 earnings per share of 39 cents.
There are a couple of problems with calculating Capital Power’s payout ratio this way. First, because of one-time factors, earnings often vary a great deal from one year to the next. Adjusted for such unusual items as impairment charges, foreign exchange gains or losses and changes in the fair value of assets, Capital Power’s “normalized earnings per share” were $1.97 in 2021. Using this higher earnings figure, the payout ratio was a less egregious 108 per cent.
That’s still uncomfortably high, which leads to the second problem with the way some websites calculate payout ratios: They often use inappropriate measures. With independent power producers such as Capital Power, earnings are often depressed by accounting charges such as depreciation that don’t affect the company’s cash flow or its ability to pay dividends. For that reason, analysts sometimes base the payout ratio on a company’s available cash flow instead of its accounting earnings.
In 2021, Capital Power’s adjusted funds from operations or AFFO – a cash flow measure included on its earnings statements – came to $5.40 a share. Dividing the company’s annual dividend per share by its AFFO per share produces a payout ratio of just under 40 per cent. That’s a heck of lot better than 543 per cent. It’s also comfortably below Capital Power’s own target payout ratio of between 45 per cent and 55 per cent.
So, the company’s dividend appears to be very sustainable indeed. What’s more, Capital Power has been raising its dividend for many years and is projecting annual increases of about 5 per cent through 2025. The company discussed this at its investor day in December; you can find a copy of the presentation in the investor relations section of its website.
Bottom line: With payout ratios, the numbers published on financial websites can sometimes lead you astray. In many cases, you need to go to the company’s financial statements and earnings presentations – and consult analysts’ reports if you have access to them – to determine if a company’s dividend is secure.
Does withholding tax apply to U.S. dollar dividends paid by Canadian companies such as Brookfield Asset Management Inc. BAM.A and Nutrien Ltd. NTR? Also, is it possible to easily direct U.S. dollar dividends to a separate U.S. dollar account at major banking institutions in Canada in order to avoid currency conversion costs? We would like to use our U.S. dollars for travel.
Dividends paid in U.S. dollars by U.S.-based companies are generally subject to withholding tax, except when the shares are held in a registered retirement savings plan, registered retirement income fund or another account that specifically provides retirement income. Tax-free savings accounts and registered education savings plans do not qualify for this exemption.
However, if a Canadian company declares dividends in U.S. dollars – as many do – U.S. withholding tax does not apply. This is true whether the shares are held in a non-registered account, RRSP, RRIF, TFSA or any other registered account. What’s more, U.S. dollar dividends declared by Canadian companies generally still qualify for the dividend tax credit. You can confirm this by reading the company’s latest dividend announcement or visiting the dividend section of its website.
So, no, you don’t need to worry about withholding tax on U.S. dividends from the Canadian stocks you mentioned.
As for avoiding currency conversion costs, it should be relatively straightforward. Generally, for Canadian companies such as Brookfield and Nutrien that are dual-listed on both a Canadian and a U.S. stock exchange, you can choose to hold the shares on either the Canadian or U.S. side of your brokerage account to match the currency in which you wish to receive the dividends. To withdraw U.S. dollars, you would likely need to open a U.S. dollar bank account to receive the transfer. Check with your broker to see what options are available for withdrawing U.S. funds without converting them to Canadian currency.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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