New Zealand undoubtedly left a lasting impression on me as one of the most stunning places I’ve ever explored. This memory resurfaced recently because my son just got back from his trip there. Coincidentally, a reader of Wealthy Retirement reached out, asking me to evaluate the dividend safety of Spark New Zealand (OTC: SPKKY). The timing couldn’t have been better for me to dive into this analysis.
While my love for New Zealand remains strong, I’m not equally enthusiastic about the dividend safety of Spark. This telecom company operates in a market limited to the country’s population of 5.2 million, making growth a real challenge. Over the past decade, its revenue has hit a plateau, and more concerning is the steady decline in its cash flow in recent years.
What’s troubling is their dividend payments, which far exceed the free cash flow they’re generating. In the fiscal year that ended in June 2024, Spark handed out $300 million in dividends but managed to generate only $110 million in free cash flow. This results in a staggering payout ratio of 271%.
Looking ahead to this fiscal year, the forecast appears more alarming. Spark is expected to rake in merely $92 million in free cash flow but plans to distribute $314 million in dividends, escalating the payout ratio to an astonishing 340%. For context, I generally regard a payout ratio of 75% or less as healthier.
Adding to Spark’s predicament is that they have just $36 million in cash reserves. To sustain their dividend payouts, they would likely need to incur additional debt. Traditionally, Spark has maintained a consistent dividend payment strategy, doling out semiannual regular and special dividends, yielding an impressive 12%.
For over a dozen years, Spark has avoided slashing its dividends and even enhanced them in recent times, boasting a commendable track record when it comes to paying dividends. However, the current level of payouts is financially unsustainable. Any reduction noticed by U.S. investors is linked to exchange rate variations and not an actual cut in the dividends.
The most pragmatic step for Spark would be to eliminate the special dividend, yet even this measure falls short of ensuring dividend sustainability. As much as I cherish Kiwi culture and landscapes, I must reluctantly assign Spark New Zealand a low grade for dividend safety.
Dividend Safety Rating: F
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