Tree Island Steel Ltd.'s (TSE:TSL) investors are due to receive a payment of CA$0.03 per share on 15th of October. This makes the dividend yield 4.7%, which will augment investor returns quite nicely.

View our latest analysis for Tree Island Steel

Estimates Indicate Tree Island Steel's Could Struggle to Maintain Dividend Payments In The Future

If the payments aren't sustainable, a high yield for a few years won't matter that much. Based on the last payment, earnings were actually smaller than the dividend, and the company was actually spending more cash than it was making. Paying out such a large dividend compared to earnings while also not generating any free cash flow would definitely be difficult to keep up.

Earnings per share could rise by 21.8% over the next year if things go the same way as they have for the last few years. Assuming the dividend continues along recent trends, we think the payout ratio could reach 223%, which probably can't continue without starting to put some pressure on the balance sheet.

Tree Island Steel's Dividend Has Lacked Consistency

Tree Island Steel has been paying dividends for a while, but the track record isn't stellar. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. Since 2015, the annual payment back then was CA$0.04, compared to the most recent full-year payment of CA$0.12. This works out to be a compound annual growth rate (CAGR) of approximately 13% a year over that time. Tree Island Steel has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

Dividend Growth Could Be Constrained

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. We are encouraged to see that Tree Island Steel has grown earnings per share at 22% per year over the past five years. EPS has been growing well, but Tree Island Steel has been paying out a massive proportion of its earnings, which can make the dividend tough to maintain.

Tree Island Steel's Dividend Doesn't Look Sustainable

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. We would probably look elsewhere for an income investment.