Investors Should Be Cautious Of Meridian Energy Limited's (NZE:MEL) 4.72% Dividend

By
Simply Wall St
Published
May 02, 2018
NZSE:MEL

Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Meridian Energy Limited (NZSE:MEL) has returned to shareholders over the past 3 years, an average dividend yield of 5.00% annually. Let's dig deeper into whether Meridian Energy should have a place in your portfolio. Check out our latest analysis for Meridian Energy

Here's how I find good dividend stocks

When researching a dividend stock, I always follow the following screening criteria:

  • Is their annual yield among the top 25% of dividend payers?
  • Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
  • Has the amount of dividend per share grown over the past?
  • Is is able to pay the current rate of dividends from its earnings?
  • Will it be able to continue to payout at the current rate in the future?

NZSE:MEL Historical Dividend Yield May 2nd 18
NZSE:MEL Historical Dividend Yield May 2nd 18

Does Meridian Energy pass our checks?

Meridian Energy has a trailing twelve-month payout ratio of 199.38%, meaning the dividend is not sufficiently covered by its earnings. Going forward, analysts expect MEL's payout to reduce to 169.07% of its earnings, which leads to a dividend yield of around 6.23%. However, EPS should increase to NZ$0.09, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment. If there is one thing that you want to be reliable in your life, it's dividend stocks and their constant income stream. The reality is that it is too early to consider Meridian Energy as a dividend investment. It has only been consistently paying dividends for 3 years, however, standard practice for reliable payers is to look for a 10-year minimum track record. Relative to peers, Meridian Energy generates a yield of 4.72%, which is high for Renewable Energy stocks but still below the market's top dividend payers.

Next Steps:

Now you know to keep in mind the reason why investors should be careful investing in Meridian Energy for the dividend. But if you are not exclusively a dividend investor, the stock could still be an interesting investment opportunity. Given that this is purely a dividend analysis, you should always research extensively before deciding whether or not a stock is an appropriate investment for you. I always recommend analysing the company's fundamentals and underlying business before making an investment decision. Below, I've compiled three key factors you should look at:

  1. Future Outlook: What are well-informed industry analysts predicting for MEL’s future growth? Take a look at our free research report of analyst consensus for MEL’s outlook.
  2. Valuation: What is MEL worth today? Even if the stock is a cash cow, it's not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether MEL is currently mispriced by the market.
  3. Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.

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