By Marc Lichtenfeld, Wealthy Retirement, 2024-09-11
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.
Spok's Free Cash Flow Has Grown Meaningfully
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.
But the Dividend Payout Is Still Too High
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.
Management Acknowledges the Dividend Isn't Affordable
Interestingly, management acknowledges that the company can't afford its dividend. During Spok's second quarter conference call, CEO Vince Kelly stated, “Our cash flow is on a path to grow into our current dividend level and cover it in full on an annual basis.”
Spok Likely Won't Raise the Dividend
That's why Wall Street's $30.4 million estimate for Spok's total dividend payout in 2024 doesn't make sense to me. Analysts are clearly expecting Spok to boost the dividend this year… but if the CEO himself acknowledges that the company isn't generating enough cash to afford its current dividend, why would it raise the dividend even further? That would be very irresponsible.
(That being said, management has already been paying a dividend it can't afford, so it's possible the analysts will be correct.)
Spok's Dividend Isn't Safe Yet
If Spok simply maintains its $0.3125 per share quarterly dividend, which equates to a generous 8.5% yield, it will pay shareholders $25.6 million this year. That would be just below the amount of free cash flow the company is forecast to bring in.
But even if that happens, the payout ratio would still be too high at 97%, so that wouldn't help the company's dividend safety rating.
Spok Has a Small Cash Buffer
Lastly, Spok has no debt, which is a positive, as it means the company is not draining cash to pay interest on debt. But with only $23.9 million in cash in the bank, it doesn't have a big buffer between its free cash flow and the amount of cash it needs in order to fund the dividend at current levels.
The bottom line is Spok can't afford its dividend right now, but that may be changing soon.
At this time, you can't consider the dividend safe. However, it's in much better shape than it was last year.
Dividend Safety Rating: C
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