Spok Holdings (Nasdaq: SPOK) – pronounced “spoke,” not “Spock,” as I hoped – is a healthcare software program firm that focuses on streamlining safe communication processes inside hospitals.
Final yr Spok introduced a 150% enhance in its dividend, which has a wholesome 7.88% yield as I write. And the corporate plans to concentrate on rising free money movement, which might be a boon for all of its traders.
So the whole lot appears to be wanting up… proper?
Properly, as soon as we begin to peel again the layers a bit, we will see that there’s much more to the story.
The primary pink flag is that regardless of an enormous bounce in 2020, the corporate’s free money movement fell 61% from 2019 to 2022. That included a 25% drop from 2021 to 2022.
Ouch! Falling free money movement is rarely a superb signal for dividend traders. That’s strikes one and two for Spok’s dividend security ranking.
Nonetheless, there was a fairly good cause for that steep decline…
Spok’s enterprise was harm considerably by the COVID-19 pandemic. That’s why the corporate took motion in February 2022, releasing a brand new strategic marketing strategy.
As a part of Spok’s renewed dedication to slicing prices and maximizing free money movement, it discontinued its Spok Go communication platform, which had seen restricted demand because of the pandemic. The corporate additionally determined to extend its dividend payout by 150%.
Whereas that each one might sound good, the corporate’s free money movement continues to be nowhere close to a degree that might permit it to securely preserve its dividend.
Our rule of thumb is that we like a inventory’s dividend payout ratio to be lower than 75%.
In 2022, Spok had a 926% payout ratio – over 12 occasions larger than our benchmark.
Analysts are projecting free money movement to develop considerably and hit $23.3 million in 2023. However even when they’re appropriate, that also wouldn’t be sufficient to cowl Spok’s anticipated dividend payout of $25 million.
Paying out extra cash to shareholders than the corporate is bringing within the door is solely not sustainable over the long run.
Spok would wish to generate $33.3 million in free money movement to hit our benchmark of a 75% payout ratio. That’s $10 million above the anticipated determine.
Now, Spok has a few issues going for it. It has by no means minimize its dividend, and it often points a particular dividend to its shareholders as a gesture of goodwill.
However that doesn’t change the corporate’s free money movement scenario.
It’s doable that Spok will finally revitalize its enterprise and recapture the success of its pre-2016 glory days.
However till we see some precise outcomes, the corporate is method too risky for its dividend to be thought-about protected.
Dividend Security Score: F
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