Here's Why We're Wary Of Buying SFL's (NYSE:SFL) For Its Upcoming Dividend

It looks like SFL Corporation Ltd. (NYSE:SFL) is about to go ex-dividend in the next 4 days. Investors can purchase shares before the 12th of March in order to be eligible for this dividend, which will be paid on the 30th of March.

SFL's next dividend payment will be US$0.15 per share. Last year, in total, the company distributed US$0.60 to shareholders. Looking at the last 12 months of distributions, SFL has a trailing yield of approximately 7.6% on its current stock price of $7.85. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether SFL can afford its dividend, and if the dividend could grow.

View our latest analysis for SFL

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. SFL reported a loss last year, so it's not great to see that it has continued paying a dividend. With the recent loss, it's important to check if the business generated enough cash to pay its 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. Thankfully its dividend payments took up just 49% of the free cash flow it generated, which is a comfortable payout ratio.

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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. 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.

Get our latest analysis on SFL's balance sheet health here.

Final Takeaway

Is SFL an attractive dividend stock, or better left on the shelf? It's hard to get used to SFL paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. 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. For example, we've found 3 warning signs for SFL (1 makes us a bit uncomfortable!) that deserve your attention before investing in the shares.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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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