SPOK - Spok Holdings: Dividend Trends By The Numbers

Summary

• Spok has a long history of rewarding shareholders through buybacks and dividends.
• The positive earnings prints in Q3 & Q4 this year were timely boosts.
• We need this near-term momentum to continue. Shares though remain in a bear market on the long-term chart.

Intro

If we pull up a weekly chart of Spok Holdings, Inc. ( SPOK ) (Healthcare Communications), we see that shares have been making lower lows for the best part of 6 years now. Although shares have risen almost $2 a share or 25%+ over the past 5+ months or so, we are always mindful of the long-term trend which in Spok's case continues to be bearish. In fact, shares recently broke below their 10-week moving average so the pattern of lower highs and lower lows could very easily repeat itself here in due course.

In saying the above, the lower Spok shares go, the more attractive its valuation invariably becomes. Six years of lower highs and lower lows have resulted in the company's sales multiple now trading at 1.18 over a trailing twelve-month average. Spok also continues to remain cheap from an asset standpoint with shares now trading very close to book value as we stand (Trailing book multiple of 1.05).

Probably the most glaring transformation in this stock over the past 6 years has been the dividend yield. Spok's present yield comes in at 15.34% as opposed to a 5-year average of 5.62%. Suffice it to say, given Spok's very keen valuation and the company's very generous dividend yield, contrarians may see potential here, especially if the company's recurring revenues can continue to hold up going forward. This really is the question though in Spok. Can the dividend continue to be paid out if indeed shares continue to make lower lows for some time to come? Let's delve into the key trends which make up the dividend to see if indeed this can come to pass if needs be.

Dividend Growth

Management raised the quarterly dividend from $0.13 cent to $0.31 cent in March of this year. Therefore the trailing 12-month dividend growth rate tops 113% which is a testament to management really considering how shares have been under pressure for quite some time now. Dividend growth is important as it protects purchasing power and it enables shareholders earn a percentage of the company's earnings.

In saying this, a trailing earnings multiple is not available at present in Spok due to negative earnings having been reported in both the fourth quarter of last year as well as the first quarter of this year. However with positive profitability of $0.10 & $0.15 per share in Q2 and Q3 this year. Furthermore $0.07 per share in bottom-line earnings is projected for the fourth quarter.

Cash-Flow Pay-Out Ratio

Operating cash flow when added up (like net earnings) comes in negative over the past four quarters but this trend changed in the third quarter. In fact, Spok reported $5.7 million of operating cash flow in Q3 and free cash flow of $4.7 million. These are positive trends going forward despite the fact that $15 million of short-term investments were transferred to investing cash flow in Q3. The significant increase in the dividend now means that the quarterly payment of the dividend tops $6 million. Suffice it to say, if the market can see a clear line of sight towards the confirmation of a sustained positive free cash-flow ratio, this would have sound ramifications for the share price of Spok going forward.

Balance Sheet

Shareholder equity came in at $153.3 million at the end of Q3 with Spok's cash balance now coming in at $37.2 million. Although Spok does not have any interest-bearing debt, the rate of decline of the company's net worth is very similar to the rate at which the share price has eroded in recent years. The worrying line item is Spok's goodwill which came in just under $100 million at the end of Q3. Goodwill is the premium paid on previous acquisitions which is kept on the balance sheet to essentially account for the expected future sales which will come off these deals. In a growth environment, holding goodwill is not a problem because the value of those deals will eventually be realized. The problem though is a negative growth environment which would bring that sizable goodwill in for extra scrutiny.

Conclusion

Therefore to sum up, although SPOK continues to pay out an outlandish dividend, the company's cash balance and equity balances continue to dwindle. With almost $25 million now going towards dividend payments annually, Spok needs to start generating cash flow on a consistent basis in order to meet this commitment to prevent the cash balance from running lower. Let's see what Q4 brings. We look forward to continued coverage.

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