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It Might Not Be A Great Idea To Buy Z Energy Limited (NZSE:ZEL) For Its Next Dividend

Simply Wall St

Z Energy Limited (NZSE:ZEL) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 21st of November to receive the dividend, which will be paid on the 10th of December.

Z Energy's next dividend payment will be NZ$0.19 per share, and in the last 12 months, the company paid a total of NZ$0.43 per share. Looking at the last 12 months of distributions, Z Energy has a trailing yield of approximately 8.2% on its current stock price of NZ$5.25. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Z Energy can afford its dividend, and if the dividend could grow.

See our latest analysis for Z Energy

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. Last year Z Energy paid out 100% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Z Energy generated enough free cash flow to afford its dividend. It paid out an unsustainably high 491% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Z Energy is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

As Z Energy'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:ZEL Historical Dividend Yield, November 16th 2019

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Z Energy earnings per share are up 3.8% per annum over the last five years. Minimal earnings growth, combined with concerningly high payout ratios suggests that Z Energy is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past six years, Z Energy has increased its dividend at approximately 19% a year on average. 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

Should investors buy Z Energy for the upcoming dividend? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Wondering what the future holds for Z Energy? See what the six 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.

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.