U.S. markets open in 8 hours 25 minutes

Why You Should Leave Spark New Zealand Limited's (NZSE:SPK) Upcoming Dividend On The Shelf

Simply Wall St

Spark New Zealand Limited (NZSE:SPK) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 12th of March will not receive the dividend, which will be paid on the 3rd of April.

Spark New Zealand's upcoming dividend is NZ$0.14 a share, following on from the last 12 months, when the company distributed a total of NZ$0.27 per share to shareholders. Based on the last year's worth of payments, Spark New Zealand stock has a trailing yield of around 5.1% on the current share price of NZ$4.93. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Spark New Zealand

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 Spark New Zealand paid out 102% 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 Spark New Zealand generated enough free cash flow to afford its dividend. Over the past year it paid out 134% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cash is slightly more important than profit from a dividend perspective, but given Spark New Zealand's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

NZSE:SPK Historical Dividend Yield, March 7th 2020

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 Spark New Zealand earnings per share are up 5.5% per annum over the last five years. Earnings per share have been growing comfortably, although unfortunately the company is paying out more of its profits than we're comfortable with over the long term.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Spark New Zealand's dividend payments are broadly unchanged compared to where they were ten years ago.

To Sum It Up

From a dividend perspective, should investors buy or avoid Spark New Zealand? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Spark New Zealand.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Spark New Zealand. Every company has risks, and we've spotted 2 warning signs for Spark New Zealand (of which 1 is concerning!) you should know about.

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.

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.