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Port of Tauranga Limited (NZSE:POT) stock is about to trade ex-dividend in 4 days. You can purchase shares before the 11th of March in order to receive the dividend, which the company will pay on the 26th of March.
Port of Tauranga's next dividend payment will be NZ$0.071 per share, on the back of last year when the company paid a total of NZ$0.12 to shareholders. Based on the last year's worth of payments, Port of Tauranga has a trailing yield of 1.6% on the current stock price of NZ$7.6. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Port of Tauranga can afford its dividend, and if the dividend could grow.
View our latest analysis for Port of Tauranga
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Port of Tauranga paid out 91% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. Port of Tauranga paid out more free cash flow than it generated - 131%, to be precise - last year, which we think is concerningly 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 Port of Tauranga'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?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Port of Tauranga earnings per share are up 3.2% per annum over the last five years. With limited earnings growth and paying out a concerningly high percentage of its earnings, the prospects of future dividend growth don't look so bright here.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Port of Tauranga has delivered 7.9% 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.