Yahoo Finance Here's Why We're Wary Of Buying Contact Energy's (NZSE:CEN) For Its Upcoming Dividend
It looks like Contact Energy Limited (NZSE:CEN) is about to go ex-dividend in the next 4 days. You will need to purchase shares before the 26th of August to receive the dividend, which will be paid on the 15th of September.
Contact Energy's upcoming dividend is NZ$0.26 a share, following on from the last 12 months, when the company distributed a total of NZ$0.39 per share to shareholders. Calculating the last year's worth of payments shows that Contact Energy has a trailing yield of 6.2% on the current share price of NZ$6.33. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
See our latest analysis for Contact Energy
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Contact Energy paid out 224% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Contact Energy paid out more free cash flow than it generated - 116%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Cash is slightly more important than profit from a dividend perspective, but given Contact Energy's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're not enthused to see that Contact Energy's earnings per share have remained effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Contact Energy has lifted its dividend by approximately 3.4% a year on average.
To Sum It Up
Is Contact Energy an attractive dividend stock, or better left on the shelf? It's been unable to generate earnings growth, yet is paying out an uncomfortably high percentage of both its profits (224%) and cash flow (116%) as dividends. It's not that we think Contact Energy is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
So if you're still interested in Contact Energy despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. To that end, you should learn about the 4 warning signs we've spotted with Contact Energy (including 2 which are significant).
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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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