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Here's Why We're Wary Of Buying Air New Zealand Limited's (NZSE:AIR) For Its Upcoming Dividend

Simply Wall St

Air New Zealand Limited (NZSE:AIR) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 5th of September to receive the dividend, which will be paid on the 18th of September.

Air New Zealand's upcoming dividend is NZ$0.13 a share, following on from the last 12 months, when the company distributed a total of NZ$0.22 per share to shareholders. Last year's total dividend payments show that Air New Zealand has a trailing yield of 7.7% on the current share price of NZ$2.85. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Air New Zealand

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. Air New Zealand paid out 92% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. Over the past year it paid out 158% of its free cash flow as dividends, which is uncomfortably 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 Air New Zealand'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.

NZSE:AIR Historical Dividend Yield, August 31st 2019

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Air 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. With limited earnings growth and paying out a concerningly high percentage of its earnings, the prospects of future dividend growth don't look so bright here.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Air New Zealand has lifted its dividend by approximately 14% a year on average.

To Sum It Up

From a dividend perspective, should investors buy or avoid Air New Zealand? Earnings per share are effectively flat, plus Air New Zealand's dividend is not well covered by either earnings or cash flow, which is not great. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Wondering what the future holds for Air New Zealand? See what the seven analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

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.