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Readers hoping to buy Contact Energy Limited (NZSE:CEN) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Therefore, if you purchase Contact Energy's shares on or after the 26th of August, you won't be eligible to receive the dividend, when it is paid on the 15th of September.
The company's next dividend payment will be NZ$0.23 per share. Last year, in total, the company distributed NZ$0.37 to shareholders. Based on the last year's worth of payments, Contact Energy has a trailing yield of 4.3% on the current stock price of NZ$8.2. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Contact Energy has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Contact Energy distributed an unsustainably high 185% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. The company paid out 96% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.
Cash is slightly more important than profit from a dividend perspective, but given Contact Energy's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
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. If earnings fall far enough, the company could be forced to cut its dividend. That explains why we're not overly excited about Contact Energy's flat earnings over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share. Earnings are not growing much and Contact Energy paid out a lot more than it earned in profit last year. This makes the dividend look potentially unsustainable in the long run.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Contact Energy has delivered 3.4% dividend growth per year on average over the past 10 years.
The Bottom Line
Is Contact Energy worth buying for its dividend? Earnings per share are effectively flat, plus Contact Energy's dividend is not well covered by either earnings or cash flow, which is not great. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
With that being said, if you're still considering Contact Energy as an investment, you'll find it beneficial to know what risks this stock is facing. To that end, you should learn about the 4 warning signs we've spotted with Contact Energy (including 1 which can't be ignored).
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. 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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