Contact Energy (NZSE:CEN) Will Pay A Larger Dividend Than Last Year At NZ$0.16

Contact Energy Limited (NZSE:CEN) will increase its dividend on the 30th of March to NZ$0.16. This will take the annual payment from 4.3% to 4.8% of the stock price, which is above what most companies in the industry pay.

View our latest analysis for Contact Energy

Contact Energy Doesn't Earn Enough To Cover Its Payments

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Based on the last payment, the company wasn't making enough to cover what it was paying to shareholders. This situation certainly isn't ideal, and could place significant strain on the balance sheet if it continues.

Looking forward, earnings per share is forecast to fall by 25.4% over the next year. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 180%, which is definitely a bit high to be sustainable going forward.

Contact Energy Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. The first annual payment during the last 10 years was NZ$0.25 in 2012, and the most recent fiscal year payment was NZ$0.35. This implies that the company grew its distributions at a yearly rate of about 3.4% over that duration. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.

There Isn't Much Room 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. We are encouraged to see that Contact Energy has grown earnings per share at 9.0% per year over the past five years. Although per-share earnings are growing at a credible rate, the massive payout ratio may limit growth in the company's future dividend payments.

Contact Energy's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Contact Energy's payments are rock solid. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come across 4 warning signs for Contact Energy you should be aware of, and 2 of them are significant. 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.