Do These 3 Checks Before Buying Genco Shipping & Trading Limited (NYSE:GNK) For Its Upcoming Dividend

Genco Shipping & Trading Limited (NYSE:GNK) stock is about to trade ex-dividend in 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase Genco Shipping & Trading's shares before the 18th of November in order to receive the dividend, which the company will pay on the 25th of November.

The company's next dividend payment will be US$0.40 per share, and in the last 12 months, the company paid a total of US$0.86 per share. Looking at the last 12 months of distributions, Genco Shipping & Trading has a trailing yield of approximately 4.9% on its current stock price of US$17.64. If you buy this business for its dividend, you should have an idea of whether Genco Shipping & Trading's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Genco Shipping & Trading

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Genco Shipping & Trading paid out 98% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Genco Shipping & Trading generated enough free cash flow to afford its dividend. Over the past year it paid out 136% 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.

Cash is slightly more important than profit from a dividend perspective, but given Genco Shipping & Trading's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Genco Shipping & Trading's earnings have been skyrocketing, up 41% per annum for the past five years. Genco Shipping & Trading's dividend was not well covered by earnings, although at least its earnings per share are growing quickly. Generally, when a company is growing this quickly and paying out all of its earnings as dividends, it can suggest either that the company is borrowing heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Genco Shipping & Trading has delivered an average of 4.2% per year annual increase in its dividend, based on the past five years of dividend payments. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

To Sum It Up

Is Genco Shipping & Trading worth buying for its dividend? While it's nice to see earnings per share growing, we're curious about how Genco Shipping & Trading intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. It's not that we think Genco Shipping & Trading is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Genco Shipping & Trading as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 2 warning signs for Genco Shipping & Trading that we strongly recommend you have a look at before investing in the company.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.