National CineMedia, Inc. (NASDAQ:NCMI) is reducing its dividend from last year's comparable payment to $0.03 on the 6th of September. The yield is still above the industry average at 7.5%.
National CineMedia's Payment Has Solid Earnings Coverage
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Even though National CineMedia is not generating a profit, it is still paying a dividend. Along with this, it is also not generating free cash flows, which raises concerns about the sustainability of the dividend.
Looking forward, earnings per share is forecast to rise exponentially over the next year. Assuming the dividend continues along recent trends, we think the payout ratio will be 4.1%, which makes us pretty comfortable with the sustainability of the dividend.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of $0.88 in 2012 to the most recent total annual payment of $0.12. Dividend payments have fallen sharply, down 86% over that time. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.
The Dividend Has Limited Growth Potential
Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. National CineMedia's earnings per share has shrunk at 61% a year over the past five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.
We're Not Big Fans Of National CineMedia's Dividend
To sum up, we don't like when dividends are cut, but in this case the dividend may have been too high to begin with. The company's earnings aren't high enough to be making such big distributions, and it isn't backed up by strong growth or consistency either. Overall, the dividend is not reliable enough to make this a good income stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, National CineMedia has 5 warning signs (and 3 which make us uncomfortable) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of 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.
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