Mercury NZ (NZSE:MCY) Is Increasing Its Dividend To NZ$0.1541

Mercury NZ Limited (NZSE:MCY) has announced that it will be increasing its dividend from last year's comparable payment on the 29th of September to NZ$0.1541. Despite this raise, the dividend yield of 3.8% is only a modest boost to shareholder returns.

View our latest analysis for Mercury NZ

Mercury NZ Is Paying Out More Than It Is Earning

Even a low dividend yield can be attractive if it is sustained for years on end. Before making this announcement, the company's dividend was much higher than its earnings. This situation certainly isn't ideal, and could place significant strain on the balance sheet if it continues.

Over the next year, EPS is forecast to expand by 192.0%. If the dividend continues on its recent course, the payout ratio in 12 months could be 127%, which is a bit high and could start applying pressure to the balance sheet.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The dividend has gone from an annual total of NZ$0.13 in 2013 to the most recent total annual payment of NZ$0.233. This implies that the company grew its distributions at a yearly rate of about 6.0% over that duration. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

Dividend Growth Potential Is Shaky

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though Mercury NZ's EPS has declined at around 15% a year. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.

Mercury NZ's Dividend Doesn't Look Great

In summary, investors will like to be receiving a higher dividend, but we have some questions about whether it can be sustained over the long term. The company's earnings aren't high enough to be making such big distributions, and it isn't backed up by strong growth or consistency either. Overall, this doesn't get us very excited from an income standpoint.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come across 3 warning signs for Mercury NZ you should be aware of, and 1 of them can't be ignored. Is Mercury NZ not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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