It looks like Helloworld Travel Limited (ASX:HLO) is about to go ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 30th of August will not receive the dividend, which will be paid on the 17th of September.
Helloworld Travel’s next dividend payment will be AU$0.13 per share. Last year, in total, the company distributed AU$0.20 to shareholders. Calculating the last year’s worth of payments shows that Helloworld Travel has a trailing yield of 4.7% on the current share price of A$4.34. 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! We need to see whether the dividend is covered by earnings and if it’s growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Helloworld Travel is paying out an acceptable 65% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Helloworld Travel generated enough free cash flow to afford its dividend. Helloworld Travel paid out more free cash flow than it generated – 180%, to be precise – last year, which we think is concerningly high. It’s hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we’d wonder how the company justifies this payout level.
Helloworld Travel does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
Helloworld Travel paid out less in dividends than it reported in profits, but unfortunately it didn’t generate enough cash to cover the dividend. Cash is king, as they say, and were Helloworld Travel to repeatedly pay dividends that aren’t well covered by cashflow, we would consider this a warning sign.
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. It’s encouraging to see Helloworld Travel has grown its earnings rapidly, up 63% a year for the past five years. Earnings have been growing quickly, but we’re concerned dividend payments consumed most of the company’s cash flow over the past year.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Helloworld Travel has delivered 6.9% dividend growth per year on average over the past 8 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.
From a dividend perspective, should investors buy or avoid Helloworld Travel? Earnings per share growth is a positive, and the company’s payout ratio looks normal. However, we note Helloworld Travel paid out a much higher percentage of its free cash flow, which makes us uncomfortable. In summary, it’s hard to get excited about Helloworld Travel from a dividend perspective.
Ever wonder what the future holds for Helloworld Travel? See what the five analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting 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 email@example.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.