Why It Might Not Make Sense To Buy NZX Limited (NZSE:NZX) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that NZX Limited (NZSE:NZX) is about to go ex-dividend in just 4 days. You will need to purchase shares before the 29th of August to receive the dividend, which will be paid on the 13th of September.

NZX’s next dividend payment will be NZ$0.035 per share, and in the last 12 months, the company paid a total of NZ$0.061 per share. Last year’s total dividend payments show that NZX has a trailing yield of 4.9% on the current share price of NZ$1.25. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for NZX

If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. NZX distributed an unsustainably high 123% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious.

When the dividend payout ratio is high, as it is in this case, the dividend is usually at greater risk of being cut in the future.

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

NZSE:NZX Historical Dividend Yield, August 24th 2019
NZSE:NZX Historical Dividend Yield, August 24th 2019

Have Earnings And Dividends Been Growing?

Companies that aren’t growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It’s not encouraging to see that NZX’s earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, NZX has lifted its dividend by approximately 8.6% a year on average.

To Sum It Up

From a dividend perspective, should investors buy or avoid NZX? While we’re glad to see that its earnings aren’t shrinking, we’re not enamored of the fact that it’s paying out 123% of last year’s earnings. These characteristics don’t generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its dividend.

Curious what other investors think of NZX? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .

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.