Do These 3 Checks Before Buying SFL Corporation Ltd. (NYSE:SFL) For Its Upcoming Dividend

By
Simply Wall St
Published
September 09, 2021
NYSE:SFL
Source: Shutterstock

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see SFL Corporation Ltd. (NYSE:SFL) is about to trade ex-dividend in the next three days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a 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. Therefore, if you purchase SFL's shares on or after the 14th of September, you won't be eligible to receive the dividend, when it is paid on the 29th of September.

The company's next dividend payment will be US$0.15 per share, on the back of last year when the company paid a total of US$0.60 to shareholders. Based on the last year's worth of payments, SFL has a trailing yield of 7.2% on the current stock price of $8.32. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for SFL

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. SFL reported a loss last year, so it's not great to see that it has continued paying a dividend. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It distributed 33% of its free cash flow as dividends, a comfortable payout level for most companies.

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

historic-dividend
NYSE:SFL Historic Dividend September 10th 2021

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. SFL was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

We'd also point out that SFL issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. SFL has seen its dividend decline 8.1% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

We update our analysis on SFL every 24 hours, so you can always get the latest insights on its financial health, here.

The Bottom Line

Is SFL an attractive dividend stock, or better left on the shelf? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." Bottom line: SFL has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering SFL as an investment, you'll find it beneficial to know what risks this stock is facing. We've identified 3 warning signs with SFL (at least 1 which shouldn't be ignored), and understanding them should be part of your investment process.

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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