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Don't Buy Spark New Zealand Limited (NZSE:SPK) For Its Next Dividend Without Doing These Checks

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·4 min read
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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 4 days. If you purchase the stock on or after the 18th of March, you won't be eligible to receive this dividend, when it is paid on the 9th of April.

Spark New Zealand's next dividend payment will be NZ$0.15 per share, on the back of last year when the company paid a total of NZ$0.25 to shareholders. Calculating the last year's worth of payments shows that Spark New Zealand has a trailing yield of 5.5% on the current share price of NZ$4.54. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

View 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 113% 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. A useful secondary check can be to evaluate whether Spark New Zealand generated enough free cash flow to afford its dividend. Dividends consumed 65% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's good to see that while Spark New Zealand's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

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historic-dividend

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. 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 explains why we're not overly excited about Spark New Zealand's flat earnings over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Spark New Zealand's dividend payments are effectively flat on where they were 10 years ago.

Final Takeaway

Is Spark New Zealand an attractive dividend stock, or better left on the shelf? Flat earnings per share and a high payout ratio are not what we like to see, although at least it paid out a lower percentage of its free cash flow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

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. Be aware that Spark New Zealand is showing 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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.

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. 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.

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