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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see NZX Limited (NZSE:NZX) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 11th of March, you won't be eligible to receive this dividend, when it is paid on the 26th of March.
NZX's next dividend payment will be NZ$0.036 per share, and in the last 12 months, the company paid a total of NZ$0.061 per share. Looking at the last 12 months of distributions, NZX has a trailing yield of approximately 3.1% on its current stock price of NZ$1.96. 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 NZX can afford its dividend, and if the dividend could grow.
See our latest analysis for NZX
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, NZX paid out 96% 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.
When the dividend payout ratio is high, as it is in this case, the dividend is usually at greater risk of being cut in the future.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. NZX's earnings per share have fallen at approximately 6.9% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. NZX has delivered 6.6% dividend growth per year on average over the past 10 years. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. NZX is already paying out 96% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
The Bottom Line
Should investors buy NZX for the upcoming dividend? Not only are earnings per share shrinking, but NZX is paying out a disconcertingly high percentage of its profit as dividends. It's not that we hate the business, but we feel that these characeristics are not desirable for investors seeking a reliable dividend stock to own for the long term. These characteristics don't generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its dividend.