It looks like Spark Energy, Inc. (NASDAQ:SPKE) is about to go ex-dividend in the next 4 days. You can purchase shares before the 30th of November in order to receive the dividend, which the company will pay on the 15th of December.
Spark Energy's next dividend payment will be US$0.18 per share, and in the last 12 months, the company paid a total of US$0.72 per share. Based on the last year's worth of payments, Spark Energy has a trailing yield of 7.2% on the current stock price of $10.09. 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 Spark Energy can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Spark Energy is paying out an acceptable 62% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Spark Energy generated enough free cash flow to afford its dividend. Luckily it paid out just 19% of its free cash flow last year.
It's positive to see that Spark Energy's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. 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 Spark Energy's 15% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
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, six years ago, Spark Energy has lifted its dividend by approximately 7.1% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.
Is Spark Energy worth buying for its dividend? The payout ratios are within a reasonable range, implying the dividend may be sustainable. Declining earnings are a serious concern, however, and could pose a threat to the dividend in future. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
However if you're still interested in Spark Energy as a potential investment, you should definitely consider some of the risks involved with Spark Energy. To that end, you should learn about the 4 warning signs we've spotted with Spark Energy (including 1 which is a bit concerning).
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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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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