Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Mercury NZ Limited (NZSE:MCY) is about to go ex-dividend in just 4 days. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Mercury NZ's shares before the 2nd of September in order to receive the dividend, which the company will pay on the 30th of September.
The company's upcoming dividend is NZ$0.20 a share, following on from the last 12 months, when the company distributed a total of NZ$0.27 per share to shareholders. Calculating the last year's worth of payments shows that Mercury NZ has a trailing yield of 4.0% on the current share price of NZ$6.80. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Mercury NZ distributed an unsustainably high 119% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year, it paid out dividends equivalent to 315% of what it generated in free cash flow, a disturbingly high percentage. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.
As Mercury NZ's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
See our latest analysis for Mercury NZ
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, Mercury NZ's earnings per share have been growing at 17% a year for the past five years. Earnings are growing pretty quickly, which is great, but it's uncomfortably to see the company paying out 119% of earnings. Unless there are extenuating circumstances, we feel this is a clear concern around the sustainability of the dividend.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Mercury NZ has delivered an average of 3.8% per year annual increase in its dividend, based on the past 10 years of dividend payments. Earnings per share have been growing much quicker than dividends, potentially because Mercury NZ is keeping back more of its profits to grow the business.
Final Takeaway
Is Mercury NZ an attractive dividend stock, or better left on the shelf? While it's nice to see earnings per share growing, we're curious about how Mercury NZ intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. It's not that we think Mercury NZ is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Although, if you're still interested in Mercury NZ and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 2 warning signs for Mercury NZ (1 is potentially serious!) that deserve your attention before investing in the shares.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.