Stock Analysis

Mercury NZ (NZSE:MCY) Is Paying Out A Larger Dividend Than Last Year

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Mercury NZ Limited's (NZSE:MCY) dividend will be increasing from last year's payment of the same period to NZ$0.1412 on 30th of September. This makes the dividend yield about the same as the industry average at 3.5%.

See our latest analysis for Mercury NZ

Mercury NZ Doesn't Earn Enough To Cover Its Payments

We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, Mercury NZ's dividend was only 58% of earnings, however it was paying out 143% of free cash flows. This signals that the company is more focused on returning cash flow to shareholders, but it could mean that the dividend is exposed to cuts in the future.

EPS is set to fall by 42.7% over the next 12 months. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 126%, which could put the dividend under pressure if earnings don't start to improve.

NZSE:MCY Historic Dividend August 18th 2022

Mercury NZ's Dividend Has Lacked Consistency

Looking back, Mercury NZ's dividend hasn't been particularly consistent. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. The annual payment during the last 9 years was NZ$0.13 in 2013, and the most recent fiscal year payment was NZ$0.218. This works out to be a compound annual growth rate (CAGR) of approximately 5.9% a year over that time. A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. It's encouraging to see that Mercury NZ has been growing its earnings per share at 20% a year over the past five years. The company doesn't have any problems growing, despite returning a lot of capital to shareholders, which is a very nice combination for a dividend stock to have.

Our Thoughts On Mercury NZ's Dividend

Overall, we always like to see the dividend being raised, but we don't think Mercury NZ will make a great income stock. While Mercury NZ is earning enough to cover the payments, the cash flows are lacking. We don't think Mercury NZ is a great stock to add to your portfolio if income is your focus.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 3 warning signs for Mercury NZ (of which 1 shouldn'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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