It looks like Nine Entertainment Co. Holdings Limited (ASX:NEC) is about to go ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, Nine Entertainment Holdings investors that purchase the stock on or after the 8th of September will not receive the dividend, which will be paid on the 19th of October.
The company’s next dividend payment will be AU$0.05 per share. Last year, in total, the company distributed AU$0.10 to shareholders. Based on the last year’s worth of payments, Nine Entertainment Holdings stock has a trailing yield of around 4.8% on the current share price of A$2.08. 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 check whether the dividend payments are covered, and if earnings are growing.
View our latest analysis for Nine Entertainment Holdings
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 Nine Entertainment Holdings paid out 101% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year, it paid out more than three-quarters (86%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.
It’s disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Nine Entertainment Holdings fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we’d be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we’re concerned to see Nine Entertainment Holdings’s earnings per share have dropped 14% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the last nine years, Nine Entertainment Holdings has lifted its dividend by approximately 10% a year on average. That’s intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Nine Entertainment Holdings is already paying out a high percentage of its income, so without earnings growth, we’re doubtful of whether this dividend will grow much in the future.
The Bottom Line
Has Nine Entertainment Holdings got what it takes to maintain its dividend payments? Earnings per share have been in decline, which is not encouraging. Worse, Nine Entertainment Holdings’s paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it’s not a good combination. Overall it doesn’t look like the most suitable dividend stock for a long-term buy and hold investor.
Having said that, if you’re looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Nine Entertainment Holdings. In terms of investment risks, we’ve identified 3 warning signs with Nine Entertainment Holdings and understanding them should be part of your investment process.
If you’re in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
