Why It Might Not Make Sense To Buy Aurizon Holdings Limited (ASX:AZJ) For Its Upcoming Dividend

Aurizon Holdings Limited (ASX:AZJ) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 1st of March in order to receive the dividend, which the company will pay on the 31st of March.

Aurizon Holdings's upcoming dividend is AU$0.14 a share, following on from the last 12 months, when the company distributed a total of AU$0.29 per share to shareholders. Based on the last year's worth of payments, Aurizon Holdings has a trailing yield of 7.3% on the current stock price of A$3.95. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Aurizon Holdings has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Aurizon Holdings

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, Aurizon Holdings paid out 101% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year it paid out 69% of its free cash flow as dividends, within the usual range for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Aurizon Holdings fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're not enthused to see that Aurizon Holdings's earnings per share have remained 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.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past nine years, Aurizon Holdings has increased its dividend at approximately 26% a year on average.

To Sum It Up

Has Aurizon Holdings got what it takes to maintain its dividend payments? The company has not generated any growth in earnings per share over the nine-year timeframe we measured. Plus, Aurizon Holdings's paying out a high percentage of its earnings and more than half its cash flow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Aurizon Holdings and want to know more, you'll find it very useful to know what risks this stock faces. For instance, we've identified 2 warning signs for Aurizon Holdings (1 is significant) you should be aware of.

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.

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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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