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Don't Race Out To Buy Port of Tauranga Limited (NZSE:POT) Just Because It's Going Ex-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 Port of Tauranga Limited (NZSE:POT) is about to go ex-dividend in just 4 days. You will need to purchase shares before the 17th of September to receive the dividend, which will be paid on the 2nd of October.

Port of Tauranga's upcoming dividend is NZ$0.075 a share, following on from the last 12 months, when the company distributed a total of NZ$0.12 per share to shareholders. Based on the last year's worth of payments, Port of Tauranga has a trailing yield of 1.7% on the current stock price of NZ$7.4. 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 Port of Tauranga has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Port of Tauranga

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Port of Tauranga paid out 93% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Port of Tauranga paid out more free cash flow than it generated - 116%, 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.

As Port of Tauranga's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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

historic-dividend
historic-dividend

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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Port of Tauranga, with earnings per share up 2.9% on average over the last five years. Minimal earnings growth, combined with concerningly high payout ratios suggests that Port of Tauranga is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Port of Tauranga has delivered an average of 7.9% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Is Port of Tauranga worth buying for its dividend? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. Bottom line: Port of Tauranga has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Port of Tauranga as an investment, you'll find it beneficial to know what risks this stock is facing. Case in point: We've spotted 1 warning sign for Port of Tauranga you should be aware of.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.