Mercury NZ Limited (NZSE:MCY) has announced that it will be increasing its dividend on the 1st of April to NZ$0.094. Based on the announced payment, the dividend yield for the company will be 3.9%, which is fairly typical for the industry.
Mercury NZ's Earnings Easily Cover the Distributions
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 57% of earnings, however it was paying out 198% of free cash flows. The company might be more focused on returning cash to shareholders, but paying out this much of its cash flow could expose the dividend to being cut in the future.
Over the next year, EPS is forecast to fall by 62.5%. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be , which is comfortable for the company to continue in the future.
Mercury NZ's Dividend Has Lacked Consistency
Even in its relatively short history, the company has reduced the dividend at least once. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. Since 2014, the dividend has gone from NZ$0.13 to NZ$0.17. This means that it has been growing its distributions at 3.4% per annum 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.
The Dividend Has Limited Growth Potential
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Mercury NZ's earnings per share has shrunk at 100% a year over the past five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future.
Mercury NZ's Dividend Doesn't Look Sustainable
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. This company is not in the top tier of income providing stocks.
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. For example, we've identified 3 warning signs for Mercury NZ (1 shouldn't be ignored!) that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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