Consider This Before Buying Mercer International Inc. (NASDAQ:MERC) For The 2.5% Dividend

Is Mercer International Inc. (NASDAQ:MERC) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

Investors might not know much about Mercer International's dividend prospects, even though it has been paying dividends for the last five years and offers a 2.5% yield. A 2.5% yield is not inspiring, but the longer payment history has some appeal. That said, the recent jump in the share price will make Mercer International's dividend yield look smaller, even though the company prospects could be improving. There are a few simple ways to reduce the risks of buying Mercer International for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Mercer International!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Although Mercer International pays a dividend, it was loss-making during the past year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Unfortunately, while Mercer International pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

We update our data on Mercer International every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Mercer International has been paying a dividend for the past five years. During the past five-year period, the first annual payment was US$0.5 in 2015, compared to US$0.3 last year. The dividend has fallen 43% over that period.

A shrinking dividend over a five-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Over the past five years, it looks as though Mercer International's EPS have declined at around 16% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Mercer International's dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Using these criteria, Mercer International looks quite suboptimal from a dividend investment perspective.

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. To that end, Mercer International has 3 warning signs (and 1 which is concerning) we think you should know about.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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