It Might Not Be A Great Idea To Buy Spark New Zealand Limited (NZSE:SPK) For Its Next Dividend

By
Simply Wall St
Published
March 13, 2021
NZSE:SPK

It looks like Spark New Zealand Limited (NZSE:SPK) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 18th of March will not receive this dividend, which will be paid on the 9th of April.

Spark New Zealand's next dividend payment will be NZ$0.15 per share. Last year, in total, the company distributed NZ$0.25 to shareholders. Based on the last year's worth of payments, Spark New Zealand stock has a trailing yield of around 5.5% on the current share price of NZ$4.54. 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! We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Spark New Zealand

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Spark New Zealand distributed an unsustainably high 113% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Spark New Zealand generated enough free cash flow to afford its dividend. It paid out more than half (65%) of its free cash flow in the past year, which is within an average 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 Spark New Zealand 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.

historic-dividend
NZSE:SPK Historic Dividend March 13th 2021

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. If earnings fall far enough, the company could be forced to cut its dividend. It's not encouraging to see that Spark New Zealand's earnings are effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Spark New Zealand's dividend payments are effectively flat on where they were 10 years ago.

Final Takeaway

Is Spark New Zealand an attractive dividend stock, or better left on the shelf? Flat earnings per share and a high payout ratio are not what we like to see, although at least it paid out a lower percentage of its free cash flow. Bottom line: Spark New Zealand has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Spark New Zealand don't faze you, it's worth being mindful of the risks involved with this business. Be aware that Spark New Zealand is showing 2 warning signs in our investment analysis, and 1 of those is significant...

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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