The board of Cogent Communications Holdings, Inc. (NASDAQ:CCOI) has announced that it will be paying its dividend of $0.995 on the 6th of December, an increased payment from last year's comparable dividend. This takes the annual payment to 4.8% of the current stock price, which unfortunately is below what the industry is paying.

Check out our latest analysis for Cogent Communications Holdings

Cogent Communications Holdings' Distributions May Be Difficult To Sustain

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Prior to this announcement, the dividend made up 468% of earnings, and the company was generating negative free cash flows. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.

Over the next year, EPS is forecast to fall off a cliff. This could force the company to make difficult decisions around continuing payouts to shareholders or putting additional pressure on the balance sheet.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The annual payment during the last 10 years was $0.87 in 2014, and the most recent fiscal year payment was $3.98. This works out to be a compound annual growth rate (CAGR) of approximately 16% a year over that time. Cogent Communications Holdings 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.

The Dividend's Growth Prospects Are Limited

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Although it's important to note that Cogent Communications Holdings' earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time. With such low earnings growth, paying out more than double what it is earning is setting up Cogent Communications Holdings to have to cut earnings in the future.

Cogent Communications Holdings' Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Cogent Communications Holdings' payments are rock solid. The track record isn't great, and the payments are a bit high to be considered sustainable. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come across 6 warning signs for Cogent Communications Holdings you should be aware of, and 4 of them are a bit unpleasant. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.