It looks like Auckland International Airport Limited (NZSE:AIA) is about to go ex-dividend in the next 4 days. Investors can purchase shares before the 19th of March in order to be eligible for this dividend, which will be paid on the 3rd of April.
Auckland International Airport's next dividend payment will be NZ$0.13 per share, and in the last 12 months, the company paid a total of NZ$0.23 per share. Calculating the last year's worth of payments shows that Auckland International Airport has a trailing yield of 3.4% on the current share price of NZ$6.6. If you buy this business for its dividend, you should have an idea of whether Auckland International Airport's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Auckland International Airport is paying out an acceptable 51% of its profit, a common payout level among most companies. 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. Auckland International Airport paid out more free cash flow than it generated - 121%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
While Auckland International Airport's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Auckland International Airport's ability to maintain its dividend.
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 earnings fall far enough, the company could be forced to cut its dividend. It's encouraging to see Auckland International Airport has grown its earnings rapidly, up 21% a year for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last ten years, Auckland International Airport has lifted its dividend by approximately 9.5% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
The Bottom Line
Should investors buy Auckland International Airport for the upcoming dividend? It's good to see that earnings per share are growing and that the company's payout ratio is within a normal range for most businesses. However we're somewhat concerned that it paid out 121% of its cashflow, which is uncomfortably high. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Auckland International Airport's dividend merits.
However if you're still interested in Auckland International Airport as a potential investment, you should definitely consider some of the risks involved with Auckland International Airport. To help with this, we've discovered 5 warning signs for Auckland International Airport (2 are concerning!) 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.
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