Here's Why We're Wary Of Buying Spok Holdings' (NASDAQ:SPOK) For Its Upcoming Dividend
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Spok Holdings, Inc. (NASDAQ:SPOK) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Spok Holdings' shares before the 14th of March in order to be eligible for the dividend, which will be paid on the 29th of March.
The company's upcoming dividend is US$0.3125 a share, following on from the last 12 months, when the company distributed a total of US$1.25 per share to shareholders. Based on the last year's worth of payments, Spok Holdings has a trailing yield of 7.1% on the current stock price of US$17.59. If you buy this business for its dividend, you should have an idea of whether Spok Holdings's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
View our latest analysis for Spok Holdings
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. Spok Holdings distributed an unsustainably high 159% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. Spok Holdings paid out more free cash flow than it generated - 113%, 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 Spok Holdings'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 how much of its profit Spok Holdings paid out over the last 12 months.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Spok Holdings has grown its earnings rapidly, up 26% a year for the past five years. Earnings per share have been growing rapidly, but the company is paying out an uncomfortably high percentage of its earnings as dividends. 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. Spok Holdings has delivered 9.6% dividend growth per year on average over the past 10 years. 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 Spok Holdings an attractive dividend stock, or better left on the shelf? While it's nice to see earnings per share growing, we're curious about how Spok Holdings 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 Spok Holdings.
So if you're still interested in Spok Holdings despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Every company has risks, and we've spotted 3 warning signs for Spok Holdings (of which 1 doesn't sit too well with us!) you should know about.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
