The board of Mercury NZ Limited (NZSE:MCY) has announced that it will be increasing its dividend on the 30th of September to NZ$0.12. The announced payment will take the dividend yield to 2.9%, which is in line with the average for the industry.
Mercury NZ Doesn't Earn Enough To Cover Its Payments
We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Prior to this announcement, Mercury NZ's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 1,447% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.
EPS is set to fall by 38.9% over the next 12 months. 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.
Mercury NZ's Dividend Has Lacked Consistency
Looking back, Mercury NZ's dividend hasn't been particularly consistent. This makes us cautious about the consistency of the dividend over a full economic cycle. The dividend has gone from NZ$0.13 in 2013 to the most recent annual payment of NZ$0.17. This works out to be a compound annual growth rate (CAGR) of approximately 3.4% a year over that time. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.
Mercury NZ Might Find It Hard To Grow Its Dividend
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. We are encouraged to see that Mercury NZ has grown earnings per share at 18% per year over the past five years. Recently, the company has been able to grow earnings at a decent rate, but with the payout ratio on the higher end we don't think the dividend has many prospects for growth.
The Dividend Could Prove To Be Unreliable
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. We would be a touch cautious of relying on this stock primarily for the dividend income.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 1 warning sign for Mercury NZ that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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