Contact Energy's (NZSE:CEN) Dividend Will Be 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. This means that the annual payment will be 4.2% of the current stock price, which is in line with the average for the industry.

Check out our latest analysis for Contact Energy

Contact Energy Is Paying Out More Than It Is Earning

Unless the payments are sustainable, the dividend yield doesn't mean too much. Prior to this announcement, the dividend made up 216% of earnings, and the company was generating negative free cash flows. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.

Over the next year, EPS is forecast to expand by 134.4%. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 111% over the next year.

Contact Energy Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2013, the annual payment back then was NZ$0.25, compared to the most recent full-year payment of NZ$0.35. This means that it has been growing its distributions at 3.4% per annum over that time. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.

Dividend Growth May Be Hard To Achieve

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Contact Energy hasn't seen much change in its earnings per share over the last five years. Paying more than double what it is paying out, and not showing a track record of being able to grow earnings, we can only see dividend cuts in the future.

Contact Energy's Dividend Doesn't Look Sustainable

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Contact Energy's payments, as there could be some issues with sustaining them into the future. Although they have been consistent in the past, we think the payments are a little high to be sustained. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 2 warning signs for Contact Energy (of which 1 is a bit unpleasant!) you should know about. Is Contact Energy not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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