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We Wouldn't Be Too Quick To Buy NZ Automotive Investments Limited (NZSE:NZA) Before It Goes Ex-Dividend

NZ Automotive Investments Limited (NZSE:NZA) is about to trade ex-dividend in the next 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. This means that investors who purchase NZ Automotive Investments' shares on or after the 15th of December will not receive the dividend, which will be paid on the 23rd of December.

The upcoming dividend for NZ Automotive Investments is NZ$0.016 per share. If you buy this business for its dividend, you should have an idea of whether NZ Automotive Investments's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for NZ Automotive Investments

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. NZ Automotive Investments distributed an unsustainably high 147% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. NZ Automotive Investments paid a dividend despite reporting negative free cash flow last year. That's typically a bad combination and - if this were more than a one-off - not sustainable.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and NZ Automotive Investments fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit NZ Automotive Investments paid out over the last 12 months.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. From this perspective, we're disturbed to see earnings per share plunged 100% over the last 12 months, and we'd wonder if the company has had some kind of major event that has skewed the calculation.

We'd also point out that NZ Automotive Investments issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.

This is NZ Automotive Investments's first year of paying a dividend, which is exciting for shareholders - but it does mean there's no dividend history to examine.

To Sum It Up

Has NZ Automotive Investments got what it takes to maintain its dividend payments? Not only are earnings per share declining, but NZ Automotive Investments is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. Bottom line: NZ Automotive Investments has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of NZ Automotive Investments don't faze you, it's worth being mindful of the risks involved with this business. To help with this, we've discovered 8 warning signs for NZ Automotive Investments (2 can't be ignored!) that you ought to be aware of before buying the shares.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.