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Why You Should Leave South Port New Zealand Limited (NZSE:SPN)'s Upcoming Dividend On The Shelf

Simply Wall St

South Port New Zealand Limited (NZSE:SPN) stock is about to trade ex-dividend in 4 days time. If you purchase the stock on or after the 31st of October, you won't be eligible to receive this dividend, when it is paid on the 12th of November.

South Port New Zealand's upcoming dividend is NZ$0.2 a share, following on from the last 12 months, when the company distributed a total of NZ$0.3 per share to shareholders. Based on the last year's worth of payments, South Port New Zealand has a trailing yield of 3.4% on the current stock price of NZ$7.74. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether South Port New Zealand can afford its dividend, and if the dividend could grow.

View our latest analysis for South Port New Zealand

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. South Port New Zealand is paying out an acceptable 70% of its profit, a common payout level among most companies. 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 92% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

South Port New Zealand paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to South Port New Zealand's ability to maintain its dividend.

Click here to see how much of its profit South Port New Zealand paid out over the last 12 months.

NZSE:SPN Historical Dividend Yield, October 26th 2019

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. This is why it's a relief to see South Port New Zealand earnings per share are up 7.9% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. South Port New Zealand has delivered 6.8% dividend growth per year on average over the past ten years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

Is South Port New Zealand worth buying for its dividend? Earnings per share have grown somewhat, although South Port New Zealand paid out over half its profits and the dividend was not well covered by free cash flow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Want to learn more about South Port New Zealand's dividend performance? Check out this visualisation of its historical revenue and earnings growth.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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.