Yahoo Finance Don't Race Out To Buy Contact Energy Limited (NZSE:CEN) Just Because It's Going Ex-Dividend
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 Contact Energy Limited (NZSE:CEN) is about to go ex-dividend in just four days. You will need to purchase shares before the 12th of March to receive the dividend, which will be paid on the 30th of March.
Contact Energy's next dividend payment will be NZ$0.16 per share, and in the last 12 months, the company paid a total of NZ$0.37 per share. Last year's total dividend payments show that Contact Energy has a trailing yield of 5.5% on the current share price of NZ$6.71. If you buy this business for its dividend, you should have an idea of whether Contact Energy's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
View our latest analysis for Contact Energy
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. Contact Energy paid out 185% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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. 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.
As Contact Energy'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.
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. If earnings fall far enough, the company could be forced to cut its dividend. It's not encouraging to see that Contact Energy's earnings are effectively flat 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.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Contact Energy has lifted its dividend by approximately 4.0% a year on average.
The Bottom Line
From a dividend perspective, should investors buy or avoid Contact Energy? 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. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
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. Every company has risks, and we've spotted 4 warning signs for Contact Energy (of which 1 is concerning!) you should know about.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
