The board of Spark New Zealand Limited (NZSE:SPK) has announced that it will pay a dividend of NZ$0.15 per share on the 1st of October. This makes the dividend yield 6.1%, which will augment investor returns quite nicely.
Spark New Zealand Doesn't Earn Enough To Cover Its Payments
If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, the company's dividend was much higher than its earnings. It will be difficult to sustain this level of payout so we wouldn't be confident about this continuing.
Over the next year, EPS is forecast to expand by 5.7%. If the dividend continues on its recent course, the payout ratio in 12 months could be 139%, which is a bit high and could start applying pressure to the balance sheet.
The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. Since 2011, the first annual payment was NZ$0.14, compared to the most recent full-year payment of NZ$0.25. This works out to be a compound annual growth rate (CAGR) of approximately 6.0% a year over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Spark New Zealand might have put its house in order since then, but we remain cautious.
Spark New Zealand May Find It Hard To Grow The Dividend
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Spark New Zealand hasn't seen much change in its earnings per share over the last five years. So the company has struggled to grow its EPS yet it's still paying out 121% of its earnings. This gives limited room for the company to raise the dividend in the future.
Spark New Zealand'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. 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.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come across 2 warning signs for Spark New Zealand you should be aware of, and 1 of them shouldn't be ignored. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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.
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