Mercury NZ (NZSE:MCY) Will Pay A Larger Dividend Than Last Year At NZ$0.1647

Mercury NZ Limited (NZSE:MCY) will increase its dividend from last year's comparable payment on the 30th of September to NZ$0.1647. The payment will take the dividend yield to 3.6%, which is in line with the average for the industry.

View our latest analysis for Mercury NZ

Mercury NZ Is Paying Out More Than It Is Earning

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Based on the last payment, the company wasn't making enough to cover what it was paying to shareholders. It will be difficult to sustain this level of payout so we wouldn't be confident about this continuing.

Earnings per share is forecast to rise by 11.1% over the next year. If the dividend continues on its recent course, the payout ratio in 12 months could be 126%, which is a bit high and could start applying pressure to the balance sheet.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of NZ$0.13 in 2014 to the most recent total annual payment of NZ$0.24. This implies that the company grew its distributions at a yearly rate of about 6.3% over that duration. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Mercury NZ might have put its house in order since then, but we remain cautious.

The Dividend's Growth Prospects Are Limited

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Over the past five years, it looks as though Mercury NZ's EPS has declined at around 4.5% a year. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

We're Not Big Fans Of Mercury NZ's Dividend

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 seems to be stretching itself a bit to make such big payments, but it doesn't appear they can be consistent over time. 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. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 1 warning sign for Mercury NZ that you should be aware of before investing. 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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