We Wouldn't Be Too Quick To Buy Spark New Zealand Limited (NZSE:SPK) Before It Goes Ex-Dividend

It looks like Spark New Zealand Limited (NZSE:SPK) 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Spark New Zealand's shares before the 24th of March in order to receive the dividend, which the company will pay on the 8th of April.

The company's next dividend payment will be NZ$0.15 per share. Last year, in total, the company distributed NZ$0.25 to shareholders. Last year's total dividend payments show that Spark New Zealand has a trailing yield of 5.3% on the current share price of NZ$4.73. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Spark New Zealand has been able to grow its dividends, or if the dividend might be cut.

View 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 112% 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 (70%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while Spark New Zealand's dividends were not covered by profits, at least they are affordable from a cash perspective. 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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's not encouraging to see that Spark New Zealand's earnings are 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 last 10 years, Spark New Zealand has lifted its dividend by approximately 6.0% a year on average.

To Sum It Up

From a dividend perspective, should investors buy or avoid Spark New Zealand? 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. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

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. For example - Spark New Zealand has 3 warning signs we think you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.