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Do These 3 Checks Before Buying Skellerup Holdings Limited (NZSE:SKL) For Its Upcoming Dividend

Simply Wall St

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Skellerup Holdings Limited (NZSE:SKL) is about to go ex-dividend in just 4 days. Investors can purchase shares before the 3rd of October in order to be eligible for this dividend, which will be paid on the 17th of October.

Skellerup Holdings's upcoming dividend is NZ$0.08 a share, following on from the last 12 months, when the company distributed a total of NZ$0.1 per share to shareholders. Last year's total dividend payments show that Skellerup Holdings has a trailing yield of 5.7% on the current share price of NZ$2.28. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Skellerup Holdings has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Skellerup Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 87% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. 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. The company paid out 100% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

Skellerup Holdings paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Skellerup Holdings to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

NZSE:SKL Historical Dividend Yield, September 28th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Skellerup Holdings's earnings per share have dropped 6.8% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last ten years, Skellerup Holdings has lifted its dividend by approximately 18% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Skellerup Holdings is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Is Skellerup Holdings an attractive dividend stock, or better left on the shelf? Skellerup Holdings had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not that we think Skellerup Holdings is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Curious what other investors think of Skellerup Holdings? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.