Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Spark New Zealand Limited (NZSE:SPK) is about to trade ex-dividend in the next four days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Meaning, you will need to purchase Spark New Zealand's shares before the 14th of September to receive the dividend, which will be paid on the 6th of October.
The company's next dividend payment will be NZ$0.16 per share, on the back of last year when the company paid a total of NZ$0.27 to shareholders. Based on the last year's worth of payments, Spark New Zealand has a trailing yield of 5.5% on the current stock price of NZ$4.92. If you buy this business for its dividend, you should have an idea of whether Spark New Zealand's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Spark New Zealand's payout ratio is modest, at just 44% of profit. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Spark New Zealand paid out more free cash flow than it generated - 157%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
While Spark New Zealand's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Spark New Zealand's ability to maintain its dividend.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. It's encouraging to see Spark New Zealand has grown its earnings rapidly, up 25% a year for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Spark New Zealand has lifted its dividend by approximately 3.0% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Spark New Zealand is keeping back more of its profits to grow the business.
To Sum It Up
Is Spark New Zealand an attractive dividend stock, or better left on the shelf? We like that Spark New Zealand has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Spark New Zealand's dividend merits.
On that note, you'll want to research what risks Spark New Zealand is facing. Be aware that Spark New Zealand is showing 4 warning signs in our investment analysis, and 2 of those can't be ignored...
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
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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.