Readers hoping to buy New Hope Corporation Limited (ASX:NHC) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Ex-dividend means that investors that purchase the stock on or after the 20th of April will not receive this dividend, which will be paid on the 5th of May.
New Hope's upcoming dividend is AU$0.06 a share, following on from the last 12 months, when the company distributed a total of AU$0.15 per share to shareholders. Based on the last year's worth of payments, New Hope stock has a trailing yield of around 9.3% on the current share price of A$1.62. If you buy this business for its dividend, you should have an idea of whether New Hope's dividend is reliable and sustainable. As a result, readers should always check whether New Hope has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. It paid out 78% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 107% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.
While New Hope's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were New Hope to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see New Hope's earnings have been skyrocketing, up 22% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. New Hope has delivered an average of 5.0% per year annual increase in its dividend, based on the past ten years of dividend payments. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
To Sum It Up
Should investors buy New Hope for the upcoming dividend? It's good to see that earnings per share are growing and that the company's payout ratio is within a normal range for most businesses. However we're somewhat concerned that it paid out 107% of its cashflow, which is uncomfortably high. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
However if you're still interested in New Hope as a potential investment, you should definitely consider some of the risks involved with New Hope. For example, we've found 2 warning signs for New Hope that we recommend you consider before investing in the business.
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.
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