New Zealand is the most beautiful place I have ever visited. I was thinking about it recently because my son just returned from a trip there, so when a Wealthy Retirement reader asked me to take a look at the dividend safety of Spark New Zealand (OTC: SPKKY), I jumped at the chance.
While I loved pretty much everything about New Zealand, I’m not sure I’d feel the same way about Spark’s dividend safety.
Growth has been hard to come by for the mobile phone company, which serves a nation of just 5.2 million people.
Revenue has been flat for a decade, and cash flow has been falling for several years.
Meanwhile, the company is paying way more in dividends than it’s generating in free cash flow.
In fiscal 2024, which ended in June, Spark paid shareholders $300 million while producing only $110 million in free cash flow. That’s an enormously high payout ratio of 271%.
This fiscal year, the discrepancy is forecast to be even worse, with the company slated to bring in just $92 million in free cash flow while paying out $314 million in dividends. That would push the payout ratio even higher, to 340%. (Remember, I generally like to see payout ratios of 75% or lower.)
Spark only has $36 million in cash, so the only way it will be able to maintain its dividend is if it takes on more debt.
The payout to shareholders consists of semiannual regular and special dividends, which have been fairly consistent. Combined, the yield comes out to a whopping 12%.
The company hasn’t cut the dividend in at least 12 years and has been raising it for the past few, so it has a solid dividend-paying track record – though it really can’t afford the dividend that it is currently paying. (There have been a few slight reductions in the dividends paid to U.S. investors, but those are because of changes to the exchange rate, not actual reductions to the dividend.)
The first thing the company needs to do is get rid of the special dividend, but even that won’t be enough to make the dividend sustainable.
Despite my fondness for all things Kiwi, I cannot give Spark New Zealand a good rating for dividend safety.
Dividend Safety Rating: F
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