Would Air New Zealand Limited (NZSE:AIR) Be Valuable To Income Investors? – Simply Wall St

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Could Air New Zealand Limited (NZSE:AIR) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.

A high yield and a long history of paying dividends is an appealing combination for Air New Zealand. It would not be a surprise to discover that many investors buy it for the dividends. There are a few simple ways to reduce the risks of buying Air New Zealand for its dividend, and we’ll go through these below.

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NZSE:AIR Historical Dividend Yield, May 15th 2019

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Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Air New Zealand paid out 80% of its profit as dividends, over the trailing twelve month period. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Air New Zealand paid out 109% of its free cash flow last year, which we think is concerning if cash flows do not improve.

Consider getting our latest analysis on Air New Zealand’s financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Air New Zealand has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was NZ$0.065 in 2009, compared to NZ$0.22 last year. This works out to be a compound annual growth rate (CAGR) of approximately 13% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Air New Zealand has grown its earnings per share at 11% per annum over the past five years. EPS are growing rapidly, although the company is also paying out more than three quarters of its profits as dividends. If earnings keep growing, the dividend may be sustainable, but generally we’d prefer to see a fast growing company reinvest in further growth.

Conclusion

Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Air New Zealand gets a pass on its dividend payout ratio, but it paid out virtually all of its cash flow as dividends. This may just be a one-off, but we’d keep an eye on this. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than Air New Zealand out there.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 7 Air New Zealand analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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