We Wouldn't Be Too Quick To Buy SkyCity Entertainment Group Limited (NZSE:SKC) Before It Goes Ex-Dividend

Readers hoping to buy SkyCity Entertainment Group Limited (NZSE:SKC) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Therefore, if you purchase SkyCity Entertainment Group's shares on or after the 2nd of March, you won't be eligible to receive the dividend, when it is paid on the 17th of March.

The company's upcoming dividend is NZ$0.071 a share, following on from the last 12 months, when the company distributed a total of NZ$0.12 per share to shareholders. Last year's total dividend payments show that SkyCity Entertainment Group has a trailing yield of 4.7% on the current share price of NZ$2.53. If you buy this business for its dividend, you should have an idea of whether SkyCity Entertainment Group's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for SkyCity Entertainment Group

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. SkyCity Entertainment Group paid out a disturbingly high 200% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and SkyCity Entertainment Group fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. 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?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see SkyCity Entertainment Group's earnings per share have dropped 15% a year over 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. SkyCity Entertainment Group has seen its dividend decline 3.4% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

The Bottom Line

Has SkyCity Entertainment Group got what it takes to maintain its dividend payments? It's not a great combination to see a company with earnings in decline and paying out 200% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Bottom line: SkyCity Entertainment Group has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with SkyCity Entertainment Group. In terms of investment risks, we've identified 3 warning signs with SkyCity Entertainment Group and understanding them should be part of your investment process.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.