Will Spok Holdings Be Able to Afford Its Dividend?

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Spok Holdings (Nasdaq: SPOK) – pronounced “spoke,” not “Spock,” as I was hoping – is a healthcare software company that specializes in streamlining secure communication processes within hospitals.

Last year Spok announced a 150% increase in its dividend, which has a healthy 7.88% yield as I write. And the company plans to focus on increasing free cash flow, which would be a boon for all of its investors.

So everything seems to be looking up… right?

Well, once we start to peel back the layers a bit, we can see that there’s a lot more to the story.

The first red flag is that despite a big jump in 2020, the company’s free cash flow fell 61% from 2019 to 2022. That included a 25% drop from 2021 to 2022.

Ouch! Falling free cash flow is never a good sign for dividend investors. That’s strikes one and two for Spok’s dividend safety rating.

However, there was a pretty good reason for that steep decline…

Spok’s business was hurt significantly by the COVID-19 pandemic. That’s why the company took action in February 2022, releasing a new strategic business plan.

As part of Spok’s renewed commitment to cutting costs and maximizing free cash flow, it discontinued its Spok Go communication platform, which had seen limited demand as a result of the pandemic. The company also decided to increase its dividend payout by 150%.

While that all may sound good, the company’s free cash flow is still nowhere near a level that would allow it to safely maintain its dividend.

Our rule of thumb is that we like a stock’s dividend payout ratio to be less than 75%.

In 2022, Spok had a 926% payout ratio – over 12 times higher than our benchmark.

Analysts are projecting free cash flow to grow significantly and hit $23.3 million in 2023. But even if they’re correct, that still wouldn’t be enough to cover Spok’s expected dividend payout of $25 million.

Paying out more cash to shareholders than the company is bringing in the door is simply not sustainable over the long term.

Spok would need to generate $33.3 million in free cash flow to hit our benchmark of a 75% payout ratio. That’s $10 million above the expected figure.

Chart: Spok Could Struggle to Afford Its Gaudy Dividend

Now, Spok has a couple of things going for it. It has never cut its dividend, and it occasionally issues a special dividend to its shareholders as a gesture of goodwill.

But that doesn’t change the company’s free cash flow situation.

It’s possible that Spok will eventually revitalize its business and recapture the success of its pre-2016 glory days.

But until we see some actual results, the company is way too volatile for its dividend to be considered safe.

Dividend Safety Rating: F

Dividend Grade Guide

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