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Why It Might Not Make Sense To Buy Genco Shipping & Trading Limited (NYSE:GNK) For Its Upcoming Dividend

Simply Wall St

It looks like Genco Shipping & Trading Limited (NYSE:GNK) is about to go ex-dividend in the next 3 days. You will need to purchase shares before the 5th of March to receive the dividend, which will be paid on the 16th of March.

Genco Shipping & Trading's upcoming dividend is US$0.17 a share, following on from the last 12 months, when the company distributed a total of US$0.70 per share to shareholders. Based on the last year's worth of payments, Genco Shipping & Trading stock has a trailing yield of around 9.1% on the current share price of $7.68. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Genco Shipping & Trading

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Genco Shipping & Trading lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Over the last year, it paid out dividends equivalent to 229% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Genco Shipping & Trading intends to continue funding this dividend, or if it could be forced to the payment.

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

NYSE:GNK Historical Dividend Yield, March 1st 2020

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Genco Shipping & Trading was unprofitable last year, but at least the general trend suggests its earnings have been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

This is Genco Shipping & Trading's first year of paying a dividend, so it doesn't have much of a history yet to compare to.

Get our latest analysis on Genco Shipping & Trading's balance sheet health here.

Final Takeaway

Is Genco Shipping & Trading worth buying for its dividend? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. It's not that we think Genco Shipping & Trading is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Wondering what the future holds for Genco Shipping & Trading? See what the five 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.

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.