Readers hoping to buy Mercury NZ Limited (NZSE:MCY) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 12th of March, you won’t be eligible to receive this dividend, when it is paid on the 1st of April.
Mercury NZ’s next dividend payment will be NZ$0.075 per share, on the back of last year when the company paid a total of NZ$0.15 to shareholders. Looking at the last 12 months of distributions, Mercury NZ has a trailing yield of approximately 3.2% on its current stock price of NZ$4.8. 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 Mercury NZ can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Mercury NZ paid out 64% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Mercury NZ paid out more free cash flow than it generated – 118%, to be precise – last year, which we think is concerningly high. We’re curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
While Mercury NZ’s dividends were covered by the company’s reported profits, cash is somewhat more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Mercury NZ’s ability to maintain its dividend.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it’s easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it’s a relief to see Mercury NZ earnings per share are up 9.9% per annum over the last five years. Earnings have been growing at a steady rate, but we’re concerned dividend payments consumed most of the company’s cash flow over the past year.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the last seven years, Mercury NZ has lifted its dividend by approximately 3.7% a year on average. We’re glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
Has Mercury NZ got what it takes to maintain its dividend payments? Earnings per share have grown somewhat, although Mercury NZ paid out over half its profits and the dividend was not well covered by free cash flow. Bottom line: Mercury NZ has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
So if you’re still interested in Mercury NZ despite it’s poor dividend qualities, you should be well informed on some of the risks facing this stock. Case in point: We’ve spotted 2 warning signs for Mercury NZ you should be aware of.
We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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