We Wouldn't Be Too Quick To Buy Cogent Communications Holdings, Inc. (NASDAQ:CCOI) Before It Goes Ex-Dividend

Cogent Communications Holdings, Inc. (NASDAQ:CCOI) stock is about to trade ex-dividend in 4 days time. Ex-dividend means that investors that purchase the stock on or after the 22nd of August will not receive this dividend, which will be paid on the 9th of September.

Cogent Communications Holdings's upcoming dividend is US$0.62 a share, following on from the last 12 months, when the company distributed a total of US$2.48 per share to shareholders. Calculating the last year's worth of payments shows that Cogent Communications Holdings has a trailing yield of 4.3% on the current share price of $58.01. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Cogent Communications Holdings has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Cogent Communications Holdings

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year, Cogent Communications Holdings paid out 327% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. A useful secondary check can be to evaluate whether Cogent Communications Holdings generated enough free cash flow to afford its dividend. Cogent Communications Holdings paid out more free cash flow than it generated - 113%, 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 Cogent Communications Holdings's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Cogent Communications Holdings's 11% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 7 years, Cogent Communications Holdings has lifted its dividend by approximately 30% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Cogent Communications Holdings is already paying out 327% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is Cogent Communications Holdings worth buying for its dividend? Not only are earnings per share declining, but Cogent Communications Holdings is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. It's not that we think Cogent Communications Holdings is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Wondering what the future holds for Cogent Communications Holdings? See what the 14 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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.

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. Thank you for reading.