We Wouldn't Be Too Quick To Buy NetLink NBN Trust (SGX:CJLU) Before It Goes Ex-Dividend

NetLink NBN Trust (SGX:CJLU) stock is about to trade ex-dividend in three days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase NetLink NBN Trust's shares on or after the 12th of November, you won't be eligible to receive the dividend, when it is paid on the 24th of November.

The company's upcoming dividend is S$0.0274 a share, following on from the last 12 months, when the company distributed a total of S$0.055 per share to shareholders. Calculating the last year's worth of payments shows that NetLink NBN Trust has a trailing yield of 5.8% on the current share price of S$0.94. If you buy this business for its dividend, you should have an idea of whether NetLink NBN Trust's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

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Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, NetLink NBN Trust paid out 265% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. NetLink NBN Trust paid out more free cash flow than it generated - 137%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

As NetLink NBN Trust's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Check out our latest analysis for NetLink NBN Trust

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. So we're not too excited that NetLink NBN Trust's earnings are down 3.3% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last eight years, NetLink NBN Trust has lifted its dividend by approximately 2.2% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. NetLink NBN Trust 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.

Final Takeaway

Should investors buy NetLink NBN Trust for the upcoming dividend? Not only are earnings per share declining, but NetLink NBN Trust is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

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 NetLink NBN Trust. Case in point: We've spotted 1 warning sign for NetLink NBN Trust you should be aware of.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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