Dividend Investors: Don't Be Too Quick To Buy Z Energy Limited (NZSE:ZEL) For Its Upcoming Dividend

By
Simply Wall St
Published
May 15, 2021
NZSE:ZEL
Source: Shutterstock

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Z Energy Limited (NZSE:ZEL) is about to go ex-dividend in just 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Meaning, you will need to purchase Z Energy's shares before the 20th of May to receive the dividend, which will be paid on the 2nd of June.

The upcoming dividend for Z Energy will put a total of NZ$0.16 per share in shareholders' pockets, up from last year's total dividends of NZ$0.14. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Z Energy

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Z Energy paid out 127% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance.

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

historic-dividend
NZSE:ZEL Historic Dividend May 15th 2021

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. With that in mind, we're discomforted by Z Energy's 7.2% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

We'd also point out that Z Energy issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Z Energy has seen its dividend decline 1.2% per annum on average over the past eight years, which is not great to see.

Final Takeaway

Is Z Energy worth buying for its dividend? Not only are earnings per share shrinking, but Z Energy is paying out a disconcertingly high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. These characteristics don't generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its dividend.

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 Z Energy. For example, we've found 4 warning signs for Z Energy (2 can't be ignored!) 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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