Seeka Limited (NZSE:SEK) stock is about to trade ex-dividend in 3 days time. Investors can purchase shares before the 12th of September in order to be eligible for this dividend, which will be paid on the 9th of October.
Seeka's next dividend payment will be NZ$0.14 per share. Last year, in total, the company distributed NZ$0.24 to shareholders. Looking at the last 12 months of distributions, Seeka has a trailing yield of approximately 4.9% on its current stock price of NZ$4.93. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Seeka can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Seeka paid out more than half (67%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Seeka generated enough free cash flow to afford its dividend.
Seeka 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 positive to see that Seeka's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Fortunately for readers, Seeka's earnings per share have been growing at 17% a year for the past five years.
Seeka also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Seeka's dividend payments are effectively flat on where they were ten years ago.
To Sum It Up
Should investors buy Seeka for the upcoming dividend? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Seeka paid out a much higher percentage of its free cash flow, which makes us uncomfortable. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
Want to learn more about Seeka's dividend performance? Check out this visualisation of its historical revenue and earnings growth.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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