Is Callidus Capital Corp.’s Dividend Sustainable?

Dividend yield and dividend safety are two very distinct things, and in this article I’m going to discuss a few ways to look at dividend yield through the lens of a cautious and skeptical investor.

Callidus Capital Corp. (TSX:CBL) is a Canadian alternative lender, lending primarily to companies that have difficulty obtaining traditional financing from large financial institutions. The company’s business model has been under fire of late, specifically due to the recent Home Capital Group Inc. scandals which have seen Canada’s largest alternative lender become the country’s fallen alternative lender over the course of just a few weeks.

Similar to Home Capital Group, Callidus Corp. has found itself in a situation where the amount of money it is paying to shareholders via dividends far exceeds its profitability in the current environment by a factor of 41. That’s right, the company’s payout ratio currently sits at 4100%, with 100% typically set as the “sustainability threshold” for most companies paying out a large portion of their earnings directly to shareholders.

With earnings unlikely to drastically improve in the short-term, Callidus will likely be forced to cut or suspend its dividend to free up capital for its core business, meaning investors will need to consider the value of the equity portion of the business, less the yield previously received, when valuing Callidus stock moving forward. A similar situation just unfolded at Home Capital Group, where the company just suspended the dividend to bolster the company’s balance sheet amid poor operating performance and a loss of investor confidence.