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Read This Before Buying Nine Entertainment Co. Holdings Limited (ASX:NEC) For Its Dividend

Simply Wall St

Is Nine Entertainment Co. Holdings Limited (ASX:NEC) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

With a five-year payment history and a 5.2% yield, many investors probably find Nine Entertainment Holdings intriguing. We'd agree the yield does look enticing. There are a few simple ways to reduce the risks of buying Nine Entertainment Holdings for its dividend, and we'll go through these below.

Click the interactive chart for our full dividend analysis

ASX:NEC Historical Dividend Yield, January 30th 2020

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Nine Entertainment Holdings paid out 62% of its profit as dividends. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. The company paid out 81% of its free cash flow as dividends last year, which is adequate, but reduces the wriggle room in the event of a downturn. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

We update our data on Nine Entertainment Holdings every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Looking at the data, we can see that Nine Entertainment Holdings has been paying a dividend for the past five years. During the past five-year period, the first annual payment was AU$0.042 in 2015, compared to AU$0.10 last year. This works out to be a compound annual growth rate (CAGR) of approximately 19% a year over that time. The dividends haven't grown at precisely 19% every year, but this is a useful way to average out the historical rate of growth.

It's not great to see that the payment has been cut in the past. We're generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Nine Entertainment Holdings has grown its earnings per share at 39% per annum over the past five years. Earnings per share are sharply up, but we wonder if paying out more than half its earnings (leaving less for reinvestment) is an implicit signal that Nine Entertainment Holdings's growth will be slower in the future.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, we think Nine Entertainment Holdings is paying out an acceptable percentage of its cashflow and profit. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Ultimately, Nine Entertainment Holdings comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 9 analysts we track are forecasting for Nine Entertainment Holdings for free with public analyst estimates for the company.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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.