NZME's (NZSE:NZM) Shareholders Will Receive A Bigger Dividend Than Last Year

NZME Limited (NZSE:NZM) has announced that it will be increasing its dividend from last year's comparable payment on the 22nd of March to NZ$0.0706. This makes the dividend yield 6.9%, which is above the industry average.

See our latest analysis for NZME

NZME Is Paying Out More Than It Is Earning

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. However, prior to this announcement, NZME's dividend was comfortably covered by both cash flow and earnings. As a result, a large proportion of what it earned was being reinvested back into the business.

Earnings per share could rise by 3.6% over the next year if things go the same way as they have for the last few years. Assuming the dividend continues along recent trends, we think the payout ratio could reach 115%, which probably can't continue without starting to put some pressure on the balance sheet.

NZME's Dividend Has Lacked Consistency

NZME has been paying dividends for a while, but the track record isn't stellar. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2017, the dividend has gone from NZ$0.07 total annually to NZ$0.08. This means that it has been growing its distributions at 2.3% per annum over that time. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

The Dividend's Growth Prospects Are Limited

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Earnings has been rising at 3.6% per annum over the last five years, which admittedly is a bit slow. While growth may be thin on the ground, NZME could always pay out a higher proportion of earnings to increase shareholder returns.

In Summary

In summary, it's great to see that the company can raise the dividend and keep it in a sustainable range. The dividend has been at reasonable levels historically, but that hasn't translated into a consistent payment. The payment isn't stellar, but it could make a decent addition to a dividend portfolio.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 2 warning signs for NZME that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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