Based on current prices, New Zealand-based telco Spark New Zealand Ltd (ASX: SPK) pays a dividend yield of 9.59%. By my count, that's the second highest out of all the stocks comprising the S&P/ASX 200 Index (ASX: XJO) – behind only mining giant Fortescue Ltd (ASX: FMG).
An ASX 200 stock with a dividend yield approaching 10% is bona fide catnip for income-seeking investors. But beware – a high dividend yield can sometimes also indicate a weakening stock price.
And if the declining stock price is driven by lower profits, it's likely that future dividend payments will also decrease. So, the income you actually wind up earning from your investment may not turn out to be what you'd originally hoped for.
In this article, we'll take a look at the reasons behind Spark's eye-watering dividend yield, so that you can decide whether it's the right investment for you.
Image source: Getty Images
What does Spark do?
First, let's take a quick look under the hood.
Spark is the largest telecommunications and digital services company in New Zealand. Most of its revenues comes from mobile, broadband and IT services, although revenues from data and high-tech (which includes artificial intelligence and the Internet of Things) are growing fast – up 30% in FY24.
Telcos are traditionally viewed as good defensive shares to hold in a diversified portfolio. The consensus opinion is that mobile and internet services are essential these days – which means companies in this industry should still be profitable even when the rest of the economy goes belly-up.
This has historically made stocks like Telstra Group Ltd (ASX: TLS) the favourites of 'set and forget' income investors.
However, this hasn't exactly proved true in the case of Spark – at least not recently. Headwinds from higher interest rates and a sluggish New Zealand economy weighed on Spark's FY24 performance, with adjusted net earnings down 21% year-on-year to NZ$342 million.
The company was also recently forced to reduce its FY25 earnings guidance by NZ$45 million, or 4%, due to weak consumer spending and subdued business investment. This also impacted its dividend forecast, which decreased from NZ 27.5 cents per share to NZ 25 cents per share.
How does Spark pay such a monster dividend yield?
Remember when I said a high dividend yield can sometimes indicate a weakening stock price? Well, that.
Spark's financial struggles have translated into a much lower share price over the past 12 months. Its stock price has fallen a whopping 46%, from almost $5 to just $2.62, as at the time of writing.
However, despite lower profits in FY24, Spark still managed to up its dividend by 1.9% to NZ 27.5 cents. A higher dividend coupled with a tumbling stock price caused its dividend yield to shoot upwards.
This suggests that the real driver behind Spark's eyewatering dividend yield is actually its lacklustre financial performance.
So, you're saying Spark is a lemon?
Well, let's not be too hasty.
Admittedly, Spark has had its struggles recently, but its share price performance may not be a fair reflection of its underlying business. In fact, I think you could make a pretty decent argument that the market has unfairly punished it, which could make it a target for value investors.
For example, you may have noticed that I referred to a 21% drop in adjusted net earnings before. The drop in reported net earnings was 72%, but that number includes a NZ $583 million net gain on the sale of its mobile tower assets in FY23, which contributed to abnormally high (unadjusted) profits in the prior comparative period.
Still, at first glance, this could give the impression that Spark is performing far worse than it actually is.
Also, keep in mind that its lower dividend guidance for FY25 still implies a dividend yield of roughly 8.7% based on current prices – which is nothing to sneeze at! That would still put it firmly in the top tier of ASX dividend shares.
Ultimately, whether Spark is the right stock for you will depend on your personal risk tolerance and investment objectives. Ongoing economic uncertainty in New Zealand makes Spark a higher-risk investment right now, but if things start to improve, Spark could offer investors both income and growth in years to come.
