Spark New Zealand Limited (NZSE:SPK) will increase its dividend from last year's comparable payment on the 6th of October to NZ$0.1588. The payment will take the dividend yield to 5.4%, which is in line with the average for the industry.
Spark New Zealand Doesn't Earn Enough To Cover Its Payments
While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Based on the last dividend, Spark New Zealand is earning enough to cover the payment, but then it makes up 161% of cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.
Over the next year, EPS is forecast to fall by 55.8%. If the dividend continues along recent trends, we estimate the payout ratio could reach 121%, which could put the dividend in jeopardy if the company's earnings don't improve.
The company has a long dividend track record, but it doesn't look great with cuts in the past. The annual payment during the last 10 years was NZ$0.20 in 2013, and the most recent fiscal year payment was NZ$0.27. This works out to be a compound annual growth rate (CAGR) of approximately 3.0% a year over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.
The Dividend Looks Likely To Grow
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. Spark New Zealand has seen EPS rising for the last five years, at 25% per annum. Spark New Zealand is clearly able to grow rapidly while still returning cash to shareholders, positioning it to become a strong dividend payer in the future.
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We don't think Spark New Zealand is a great stock to add to your portfolio if income is your focus.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 4 warning signs for Spark New Zealand (2 don't sit too well with us!) that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated 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.