Should You Buy Contact Energy Limited (NZE:CEN) For Its Dividend?
Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Over the past 10 years, Contact Energy Limited (NZSE:CEN) has returned an average of 5.00% per year to shareholders in terms of dividend yield. Does Contact Energy tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis. View our latest analysis for Contact Energy
Here’s how I find good dividend stocks
When researching a dividend stock, I always follow the following screening criteria:
Is it paying an annual yield above 75% of dividend payers?
Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?
Has it increased its dividend per share amount over the past?
Can it afford to pay the current rate of dividends from its earnings?
Will the company be able to keep paying dividend based on the future earnings growth?
How well does Contact Energy fit our criteria?
The company currently pays out 178.84% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is not sufficiently covered by its earnings. In the near future, analysts are predicting a lower payout ratio of 136.45%, leading to a dividend yield of around 6.27%. However, EPS should increase to NZ$0.22, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment. Reliablity is an important factor for dividend stocks, particularly for income investors who want a strong track record of payment and a positive outlook for future payout. Dividend payments from Contact Energy have been volatile in the past 10 years, with some years experiencing significant drops of over 25%. This means that dividend hunters should probably steer clear of the stock, at least for now until the track record improves. In terms of its peers, Contact Energy produces a yield of 4.80%, which is on the low-side for Electric Utilities stocks.
Next Steps:
Now you know to keep in mind the reason why investors should be careful investing in Contact 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, I recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. There are three relevant factors you should further research:
Future Outlook: What are well-informed industry analysts predicting for CEN’s future growth? Take a look at our free research report of analyst consensus for CEN’s outlook.
Valuation: What is CEN 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 CEN is currently mispriced by the market.
Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
