It Might Not Be A Great Idea To Buy NetLink NBN Trust (SGX:CJLU) For Its Next Dividend

It looks like NetLink NBN Trust (SGX:CJLU) is about to go ex-dividend in the next four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Meaning, you will need to purchase NetLink NBN Trust's shares before the 29th of May to receive the dividend, which will be paid on the 12th of June.

The company's upcoming dividend is S$0.0265 a share, following on from the last 12 months, when the company distributed a total of S$0.053 per share to shareholders. Calculating the last year's worth of payments shows that NetLink NBN Trust has a trailing yield of 6.1% on the current share price of S$0.87. 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 NetLink NBN Trust can afford its dividend, and if the dividend could grow.

Check out our latest analysis for NetLink NBN Trust

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, NetLink NBN Trust paid out 206% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. 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. Over the past year it paid out 131% of its free cash flow as dividends, which is uncomfortably 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.

As NetLink NBN Trust's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at NetLink NBN Trust, with earnings per share up 5.9% on average over the last five years. Earnings per share have been growing steadily, although a payout ratio this high suggests future growth is likely to slow, and the dividend may also be at risk of a cut if business enters a downturn.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. NetLink NBN Trust has delivered 2.3% dividend growth per year on average over the past six years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Is NetLink NBN Trust an attractive dividend stock, or better left on the shelf? NetLink NBN Trust is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Although, if you're still interested in NetLink NBN Trust and want to know more, you'll find it very useful to know what risks this stock faces. Our analysis shows 1 warning sign for NetLink NBN Trust and you should be aware of this before buying any shares.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.