Contact Energy (NZSE:CEN) Has Announced A Dividend Of NZ$0.2418

Contact Energy Limited's (NZSE:CEN) investors are due to receive a payment of NZ$0.2418 per share on 26th of September. Based on this payment, the dividend yield will be 4.2%, which is fairly typical for the industry.

Check out our latest analysis for Contact Energy

Contact Energy Doesn't Earn Enough To Cover Its Payments

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Based on the last payment, earnings were actually smaller than the dividend, and the company was actually spending more cash than it was making. Paying out such a large dividend compared to earnings while also not generating any free cash flow would definitely be difficult to keep up.

Earnings per share is forecast to rise by 134.4% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could reach 111%, which probably can't continue without putting some pressure on the balance sheet.

Contact Energy Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. The dividend has gone from an annual total of NZ$0.25 in 2013 to the most recent total annual payment of NZ$0.35. This implies that the company grew its distributions at a yearly rate of about 3.4% over that duration. Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think makes this a fairly attractive offer.

Contact Energy May Find It Hard To Grow The Dividend

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Although it's important to note that Contact Energy's earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time. With such low earnings growth, paying out more than double what it is earning is setting up Contact Energy to have to cut earnings in the future.

The Dividend Could Prove To Be Unreliable

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. Although they have been consistent in the past, we think the payments are a little high to be sustained. We don't think Contact Energy is a great stock to add to your portfolio if income is your focus.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 2 warning signs for Contact Energy (of which 1 can't be ignored!) you should know about. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.