Here's Why We're Wary Of Buying Genesis Energy's (NZSE:GNE) For Its Upcoming Dividend

It looks like Genesis Energy Limited (NZSE:GNE) is about to go ex-dividend in the next 4 days. You can purchase shares before the 17th of March in order to receive the dividend, which the company will pay on the 1st of April.

Genesis Energy's next dividend payment will be NZ$0.098 per share, on the back of last year when the company paid a total of NZ$0.17 to shareholders. Based on the last year's worth of payments, Genesis Energy stock has a trailing yield of around 4.5% on the current share price of NZ$3.845. If you buy this business for its dividend, you should have an idea of whether Genesis Energy's dividend is reliable and sustainable. As a result, readers should always check whether Genesis Energy has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Genesis Energy

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. Genesis Energy paid out 200% 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. A useful secondary check can be to evaluate whether Genesis Energy generated enough free cash flow to afford its dividend. It distributed 49% of its free cash flow as dividends, a comfortable payout level for most companies.

It's good to see that while Genesis Energy'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. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's not ideal to see Genesis Energy's earnings per share have been shrinking at 3.8% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Genesis Energy has delivered an average of 3.9% per year annual increase in its dividend, based on the past seven years of dividend payments. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Genesis Energy is already paying out 200% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Is Genesis Energy an attractive dividend stock, or better left on the shelf? It's not a great combination to see a company with earnings in decline and paying out 200% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Genesis Energy's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think Genesis Energy is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

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 Genesis Energy. Every company has risks, and we've spotted 3 warning signs for Genesis Energy (of which 1 is a bit unpleasant!) you should know about.

If you're in the market for dividend stocks, we recommend checking our list of top 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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