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Don't Buy Spark New Zealand Limited (NZSE:SPK) For Its Next Dividend Without Doing These Checks

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Spark New Zealand Limited (NZSE:SPK) is about to trade ex-dividend in the next four days. You can purchase shares before the 17th of September in order to receive the dividend, which the company will pay on the 2nd of October.

Spark New Zealand's next dividend payment will be NZ$0.15 per share, on the back of last year when the company paid a total of NZ$0.25 to shareholders. Looking at the last 12 months of distributions, Spark New Zealand has a trailing yield of approximately 5.2% on its current stock price of NZ$4.77. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Spark New Zealand can afford its dividend, and if the dividend could grow.

View our latest analysis for Spark New Zealand

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year, Spark New Zealand paid out 108% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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 80% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Spark New Zealand fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

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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. 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 encouraged by the steady growth at Spark New Zealand, with earnings per share up 2.7% on average over the last five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Spark New Zealand's dividend payments are effectively flat on where they were 10 years ago.

To Sum It Up

Has Spark New Zealand got what it takes to maintain its dividend payments? While earnings per share have been growing slowly, Spark New Zealand is paying out an uncomfortably high percentage of its earnings. However it did pay out a lower percentage of its cashflow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Spark New Zealand and want to know more, you'll find it very useful to know what risks this stock faces. Be aware that Spark New Zealand is showing 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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.

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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