Don't Buy Port of Tauranga Limited (NZSE:POT) For Its Next Dividend Without Doing These Checks

It looks like Port of Tauranga Limited (NZSE:POT) is about to go ex-dividend in the next 4 days. Investors can purchase shares before the 11th of March in order to be eligible for this dividend, which will be paid on the 26th of March.

Port of Tauranga's next dividend payment will be NZ$0.071 per share, on the back of last year when the company paid a total of NZ$0.12 to shareholders. Based on the last year's worth of payments, Port of Tauranga stock has a trailing yield of around 1.6% on the current share price of NZ$7.6. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Port of Tauranga can afford its dividend, and if the dividend could grow.

See our latest analysis for Port of Tauranga

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. Last year, Port of Tauranga paid out 91% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its 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. Port of Tauranga paid out more free cash flow than it generated - 131%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cash is slightly more important than profit from a dividend perspective, but given Port of Tauranga's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Port of Tauranga, with earnings per share up 3.2% on average over the last five years. With limited earnings growth and paying out a concerningly high percentage of its earnings, the prospects of future dividend growth don't look so bright here.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Port of Tauranga has delivered 7.9% dividend growth per year on average over the past 10 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

From a dividend perspective, should investors buy or avoid Port of Tauranga? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. It's not that we think Port of Tauranga is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in Port of Tauranga despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. To help with this, we've discovered 1 warning sign for Port of Tauranga that you should be aware of before investing in their shares.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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