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Will Canadian Pacific Railway’s High Debt Hamper Its Dividends?

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Canadian Pacific’s dividends

Canadian Pacific Railway (CP) announced a dividend of just over $0.56 Canadian dollars per share 2Q17 in June 2017 to be paid to shareholders on July 31, 2017. After maintaining a quarterly dividend of $0.5 per share for the past four quarters, the company has announced a 12.5% rise in its quarterly dividend.

Canadian Pacific’s dividend growth has not been negative for 15 years. At times, the company has kept a stable quarterly dividend per share, which represents a departure from US peers Norfolk Southern (NSC), CSX (CSX), and Union Pacific (UNP). We should also note that the 48% rise in CP’s annualized dividend has been the highest among its Class I peers.

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CP’s free cash flows and dividends

In the past five years, Canadian Pacific Railway has been able to grow its cash from operating activities fourfold to $2.1 billion Canadian dollars in 2016. The company’s capital expenditure, however, was almost at the same level ($1.2 billion Canadian dollars) during the same period. This resulted in a rise of almost five times in its free cash flow, which grew from $180.0 million Canadian dollars to $907.0 million Canadian dollars in 2016.

The ratio-wise cashflow statistics of Canadian Pacific remain the best among its Class I peers. However, its debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio remains a concern, as it’s still the highest in the peer group, after Genesee & Wyoming (GWR).

In the past two years, CP’s total debt has jumped by $2.0 billion Canadian dollars. In the current rising interest rate environment, this could force Canadian Pacific to repay its debt, which could hamper future cash distributions to stock owners.

ETFs

If you want exposure to dividend-paying industrial companies, you might consider the Vanguard Dividend Appreciation ETF (VIG). Major US aerospace and defense companies make up nearly 10% of VIG’s portfolio holdings.

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