Don't Buy NLI Holdings, Inc. (NYSE:NL) For Its Next Dividend Without Doing These Checks
NLI Holdings, Inc. (NYSE:NL) stock is about to trade ex-dividend in three days. The ex-dividend date occurs one day before the record date, which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Therefore, if you purchase NLI Holdings' shares on or after the 3rd of September, you won't be eligible to receive the dividend, when it is paid on the 22nd of September.
The company's upcoming dividend is US$0.10 a share, following on from the last 12 months, when the company distributed a total of US$0.40 per share to shareholders. Last year's total dividend payments show that NLI Holdings has a trailing yield of 5.9% on the current share price of US$6.73. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether NLI Holdings can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. NLI Holdings reported a loss last year, so it's not great to see that it has continued paying a dividend. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If NLI Holdings didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. It paid out an unsustainably high 356% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how NLI Holdings intends to continue funding this dividend, or if it could be forced to cut the payment.
NLI Holdings does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
View our latest analysis for NLI Holdings
Click here to see how much of its profit NLI Holdings paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. NLI Holdings was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. NLI Holdings has delivered 14% dividend growth per year on average over the past seven years.
We update our analysis on NLI Holdings every 24 hours, so you can always get the latest insights on its financial health, here.
The Bottom Line
Should investors buy NLI Holdings for the upcoming dividend? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
With that being said, if you're still considering NLI Holdings as an investment, you'll find it beneficial to know what risks this stock is facing. To help with this, we've discovered 2 warning signs for NLI Holdings that you should be aware of before investing in their shares.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.