The board of Mercury NZ Limited (NZSE:MCY) has announced that it will be paying its dividend of NZ$0.1412 on the 30th of September, an increased payment from last year's comparable dividend. This makes the dividend yield about the same as the industry average at 3.4%.
Mercury NZ Doesn't Earn Enough To Cover Its Payments
Solid dividend yields are great, but they only really help us if the payment is sustainable. Based on the last dividend, Mercury NZ is earning enough to cover the payment, but then it makes up 130% of cash flows. This signals that the company is more focused on returning cash flow to shareholders, but it could mean that the dividend is exposed to cuts in the future.
EPS is set to fall by 43.1% over the next 12 months. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 127%, which could put the dividend under pressure if earnings don't start to improve.
Mercury NZ's Dividend Has Lacked Consistency
Looking back, Mercury NZ's dividend hasn't been particularly consistent. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2013, the dividend has gone from NZ$0.13 total annually to NZ$0.20. This works out to be a compound annual growth rate (CAGR) of approximately 4.9% a year 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 Looks Likely To Grow
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's encouraging to see that Mercury NZ has been growing its earnings per share at 20% a year over the past five years. The company doesn't have any problems growing, despite returning a lot of capital to shareholders, which is a very nice combination for a dividend stock to have.
Overall, we always like to see the dividend being raised, but we don't think Mercury NZ will make a great income stock. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. Overall, we don't think this company has the makings of a good income stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Mercury NZ has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about. 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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