Dividend Investors: Don't Be Too Quick To Buy The Navigator Company, S.A. (ELI:NVG) For Its Upcoming Dividend

The Navigator Company, S.A. (ELI:NVG) stock is about to trade ex-dividend in 2 days. Ex-dividend means that investors that purchase the stock on or after the 8th of December will not receive this dividend, which will be paid on the 10th of December.

Navigator Company's next dividend payment will be €0.14 per share, and in the last 12 months, the company paid a total of €0.14 per share. Based on the last year's worth of payments, Navigator Company stock has a trailing yield of around 5.4% on the current share price of €2.6. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Navigator Company

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. Last year, Navigator Company paid out 103% 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. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It distributed 40% of its free cash flow as dividends, a comfortable payout level 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 Navigator Company 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. 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?

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. With that in mind, we're discomforted by Navigator Company's 12% per annum decline in earnings in the past 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. Since the start of our data, 10 years ago, Navigator Company has lifted its dividend by approximately 5.4% a year on average. 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. Navigator Company is already paying out 103% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Has Navigator Company got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 103% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Navigator Company's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Navigator Company.

So if you're still interested in Navigator Company despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For instance, we've identified 5 warning signs for Navigator Company (1 doesn't sit too well with us) you should be aware of.

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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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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