Contact Energy (NZSE:CEN) Has Announced That Its Dividend Will Be Reduced To NZ$0.23

Contact Energy Limited (NZSE:CEN) is reducing its dividend to NZ$0.23 on the 15th of September. The dividend yield of 4.8% is still a nice boost to shareholder returns, despite the cut.

Check out our latest analysis for Contact Energy

Contact Energy Is Paying Out More Than It Is Earning

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, the company was paying out 185% of what it was earning and 93% of cash flows. This indicates that the company could be more focused on returning cash to shareholders than reinvesting to grow the business.

Over the next year, EPS is forecast to expand by 10.2%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 192%, which probably can't continue 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. Since 2011, the dividend has gone from NZ$0.25 to NZ$0.35. This works out to be a compound annual growth rate (CAGR) of approximately 3.4% a year over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

Contact Energy's Dividend Might Lack Growth

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Contact Energy has impressed us by growing EPS at 27% per year over the past five years. Although earnings per share is up nicely Contact Energy is paying out 185% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.

Our Thoughts On Contact Energy's Dividend

Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. While the current distribution levels might be a bit unsustainable, we can't deny that until now it has been very stable. We don't think Contact Energy is a great stock to add to your portfolio if income is your focus.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 4 warning signs for Contact Energy (of which 1 is a bit unpleasant!) you should know about. We have also put together a list of global stocks with a solid dividend.

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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.
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