It Might Not Be A Great Idea To Buy SeaLink Travel Group Limited (ASX:SLK) For Its Next Dividend

SeaLink Travel Group Limited (ASX:SLK) stock is about to trade ex-dividend in four days. This means that investors who purchase shares on or after the 11th of March will not receive the dividend, which will be paid on the 31st of March.

SeaLink Travel Group's next dividend payment will be AU$0.07 per share, on the back of last year when the company paid a total of AU$0.12 to shareholders. Last year's total dividend payments show that SeaLink Travel Group has a trailing yield of 1.4% on the current share price of A$8.35. If you buy this business for its dividend, you should have an idea of whether SeaLink Travel Group's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for SeaLink Travel Group

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, SeaLink Travel Group paid out 255% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 24% of its free cash flow as dividends last year, which is conservatively low.

It's good to see that while SeaLink Travel Group's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by SeaLink Travel Group's 18% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

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, seven years ago, SeaLink Travel Group has lifted its dividend by approximately 6.7% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. SeaLink Travel Group is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Should investors buy SeaLink Travel Group for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 255% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in SeaLink Travel Group's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of SeaLink Travel Group.

Although, if you're still interested in SeaLink Travel Group and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 3 warning signs for SeaLink Travel Group (1 doesn't sit too well with us!) that deserve your attention before investing in the shares.

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.

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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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