Don't Buy South Port New Zealand Limited (NZSE:SPN) For Its Next Dividend Without Doing These Checks

Simply Wall St
·4-min read

South Port New Zealand Limited (NZSE:SPN) stock is about to trade ex-dividend in four days. You will need to purchase shares before the 30th of October to receive the dividend, which will be paid on the 10th of November.

South Port New Zealand's upcoming dividend is NZ$0.22 a share, following on from the last 12 months, when the company distributed a total of NZ$0.26 per share to shareholders. Based on the last year's worth of payments, South Port New Zealand has a trailing yield of 3.5% on the current stock price of NZ$7.52. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for South Port New Zealand

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. South Port New Zealand is paying out an acceptable 72% of its profit, a common payout level among most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 96% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

South Port New Zealand paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were South Port New Zealand to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit South Port New Zealand paid out over the last 12 months.

historic-dividend
historic-dividend

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see South Port New Zealand earnings per share are up 4.0% per annum over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. South Port New Zealand has delivered 7.2% dividend growth per year on average over the past 10 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.

To Sum It Up

From a dividend perspective, should investors buy or avoid South Port New Zealand? Earnings per share have grown somewhat, although South Port New Zealand paid out over half its profits and the dividend was not well covered by free cash flow. Bottom line: South Port New Zealand has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Curious about whether South Port New Zealand has been able to consistently generate growth? Here's a chart of its historical revenue and earnings growth.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.