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Don't Buy Six Flags Entertainment Corporation (NYSE:SIX) For Its Next Dividend Without Doing These Checks

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 Six Flags Entertainment Corporation (NYSE:SIX) is about to go ex-dividend in just 4 days. You can purchase shares before the 4th of September in order to receive the dividend, which the company will pay on the 16th of September.

Six Flags Entertainment's next dividend payment will be US$0.82 per share, and in the last 12 months, the company paid a total of US$3.28 per share. Based on the last year's worth of payments, Six Flags Entertainment stock has a trailing yield of around 5.7% on the current share price of $58.03. If you buy this business for its dividend, you should have an idea of whether Six Flags Entertainment's dividend is reliable and sustainable. So we need to investigate whether Six Flags Entertainment can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Six Flags Entertainment

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. Last year Six Flags Entertainment paid out 99% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Six Flags Entertainment generated enough free cash flow to afford its dividend. The company paid out 104% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Cash is slightly more important than profit from a dividend perspective, but given Six Flags Entertainment's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

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

NYSE:SIX Historical Dividend Yield, August 30th 2019

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Six Flags Entertainment's earnings have been skyrocketing, up 22% per annum for the past five years. Six Flags Entertainment's dividend was not well covered by earnings, although at least its earnings per share are growing quickly. Generally, when a company is growing this quickly and paying out all of its earnings as dividends, it can suggest either that the company is borrowing heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Six Flags Entertainment has delivered an average of 34% per year annual increase in its dividend, based on the past 9 years of dividend payments. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Final Takeaway

Should investors buy Six Flags Entertainment for the upcoming dividend? While it's nice to see earnings per share growing, we're curious about how Six Flags Entertainment intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Six Flags Entertainment.

Ever wonder what the future holds for Six Flags Entertainment? See what the 13 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

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.