Wednesday, September 11, 2024

When Will This 8.5% Yielder Be Able to Afford Its Dividend?

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When Will This 8.5% Yielder Be Able to Afford Its Dividend?

Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Marc Lichtenfeld

Nearly a year ago, Safety Net gave healthcare communications company Spok Holdings (Nasdaq: SPOK), which is pronounced "spoke," an "F" for dividend safety - mostly because of plummeting free cash flow between 2019 and 2022.

Additionally, after a 150% dividend increase in 2022, the company's payout ratio was over 900%! That means it was paying an astonishing $9 in dividends for every $1 in free cash flow. That's as unsustainable as it gets.

Let's see whether Spok has improved its ability to pay its dividend since last November.

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Spok's free cash flow has grown meaningfully in 2023 and 2024, rising from just $2.7 million in 2022 to $22.8 million last year and an expected $26.5 million this year. So the company is already in much better financial shape.

However, Spok's total dividend payout is forecast to rise from $25.6 million in 2023 to $30.4 million in 2024, so it is likely still paying shareholders more than it's taking in.

Chart: Spok Still Can't Afford Its Dividend
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But I believe there's a key flaw in that estimate that makes the 114.8% payout ratio misleading...

Click the button below to see what I mean.

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