Yahoo Finance We Wouldn't Be Too Quick To Buy Spark New Zealand Limited (NZSE:SPK) Before It Goes Ex-Dividend
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. Therefore, if you purchase Spark New Zealand's shares on or after the 21st of March, you won't be eligible to receive the dividend, when it is paid on the 5th of April.
The company's next dividend payment will be NZ$0.1588235 per share, on the back of last year when the company paid a total of NZ$0.27 to shareholders. Looking at the last 12 months of distributions, Spark New Zealand has a trailing yield of approximately 5.5% on its current stock price of NZ$4.90. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Spark New Zealand can afford its dividend, and if the dividend could grow.
Check out our latest analysis for Spark New Zealand
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Spark New Zealand paid out 117% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out an unsustainably high 343% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.
Cash is slightly more important than profit from a dividend perspective, but given Spark New Zealand's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Spark New Zealand earnings per share are up 3.4% per annum over the last five years. With limited earnings growth and paying out a concerningly high percentage of its earnings, the prospects of future dividend growth don't look so bright here.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Spark New Zealand has delivered 5.4% dividend growth per year on average over the past 10 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
The Bottom Line
Is Spark New Zealand worth buying for its dividend? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. It's not that we think Spark New Zealand is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Although, if you're still interested in Spark New Zealand and want to know more, you'll find it very useful to know what risks this stock faces. We've identified 3 warning signs with Spark New Zealand (at least 1 which is a bit concerning), and understanding these should be part of your investment process.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
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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.
