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Here's Why We're Wary Of Buying Gentrack Group Limited's (NZSE:GTK) For Its Upcoming Dividend

Simply Wall St

Gentrack Group Limited (NZSE:GTK) stock is about to trade ex-dividend in 4 days time. This means that investors who purchase shares on or after the 6th of December will not receive the dividend, which will be paid on the 18th of December.

Gentrack Group's upcoming dividend is NZ$0.035 a share, following on from the last 12 months, when the company distributed a total of NZ$0.08 per share to shareholders. Last year's total dividend payments show that Gentrack Group has a trailing yield of 2.0% on the current share price of NZ$4. If you buy this business for its dividend, you should have an idea of whether Gentrack Group's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Gentrack Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Gentrack Group lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Gentrack Group didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. It paid out an unsustainably high 207% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

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

NZSE:GTK Historical Dividend Yield, December 1st 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Gentrack Group was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

We'd also point out that Gentrack Group issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last five years, Gentrack Group has lifted its dividend by approximately 17% a year on average.

Get our latest analysis on Gentrack Group's balance sheet health here.

Final Takeaway

Has Gentrack Group got what it takes to maintain its dividend payments? It's hard to get used to Gentrack Group paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Ever wonder what the future holds for Gentrack Group? See what the four 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.

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.

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. Thank you for reading.