Is SeaLink Travel Group Limited (ASX:SLK) At Risk Of Cutting Its Dividend?

Today we'll take a closer look at SeaLink Travel Group Limited (ASX:SLK) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

With a 1.6% yield and a seven-year payment history, investors probably think SeaLink Travel Group looks like a reliable dividend stock. While the yield may not look too great, the relatively long payment history is interesting. There are a few simple ways to reduce the risks of buying SeaLink Travel Group for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on SeaLink Travel Group!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Although it reported a loss over the past 12 months, SeaLink Travel Group currently pays a dividend. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

SeaLink Travel Group's cash payout ratio in the last year was 30%, which suggests dividends were well covered by cash generated by the business.

We update our data on SeaLink Travel Group every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that SeaLink Travel Group has been paying a dividend for the past seven years. It's good to see that SeaLink Travel Group has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past seven-year period, the first annual payment was AU$0.07 in 2014, compared to AU$0.1 last year. This works out to be a compound annual growth rate (CAGR) of approximately 6.0% a year over that time. The dividends haven't grown at precisely 6.0% every year, but this is a useful way to average out the historical rate of growth.

Dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. SeaLink Travel Group's earnings per share have shrunk at 11% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and SeaLink Travel Group's earnings per share, which support the dividend, have been anything but stable.

We'd also point out that SeaLink Travel Group issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're not keen on the fact that SeaLink Travel Group paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In summary, SeaLink Travel Group has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 2 warning signs for SeaLink Travel Group that you should be aware of before investing.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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