Here's Why We're Wary Of Buying Scales' (NZSE:SCL) For Its Upcoming Dividend

By
Simply Wall St
Published
December 26, 2021
NZSE:SCL
Source: Shutterstock

It looks like Scales Corporation Limited (NZSE:SCL) is about to go ex-dividend in the next 4 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase Scales' shares before the 31st of December to receive the dividend, which will be paid on the 14th of January.

The company's next dividend payment will be NZ$0.11 per share, and in the last 12 months, the company paid a total of NZ$0.19 per share. Looking at the last 12 months of distributions, Scales has a trailing yield of approximately 3.5% on its current stock price of NZ$5.45. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Scales

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Scales distributed an unsustainably high 111% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. Over the past year it paid out 148% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

As Scales's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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

historic-dividend
NZSE:SCL Historic Dividend December 26th 2021

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Scales's earnings per share have fallen at approximately 8.1% a year over the previous 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. Scales has delivered an average of 9.6% per year annual increase in its dividend, based on the past seven years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Scales is already paying out 111% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

From a dividend perspective, should investors buy or avoid Scales? Not only are earnings per share declining, but Scales is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Although, if you're still interested in Scales and want to know more, you'll find it very useful to know what risks this stock faces. Be aware that Scales is showing 2 warning signs in our investment analysis, and 1 of those can't be ignored...

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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