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NZME Limited (NZSE:NZM) will pay a dividend of NZ$0.0706 on the 31st of March. This means the annual payment is 7.8% of the current stock price, which is above the average for the industry.
View our latest analysis for NZME
NZME's Projections Indicate Future Payments May Be Unsustainable
A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, NZME's dividend was higher than its profits, but the free cash flows quite comfortably covered it. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.
Over the next year, EPS is forecast to expand by 51.0%. If the dividend continues on its recent course, the payout ratio in 12 months could be 113%, which is a bit high and could start applying pressure to the balance sheet.
NZME's Dividend Has Lacked Consistency
Even in its relatively short history, the company has reduced the dividend at least once. This suggests that the dividend might not be the most reliable. The dividend has gone from an annual total of NZ$0.07 in 2016 to the most recent total annual payment of NZ$0.09. This works out to be a compound annual growth rate (CAGR) of approximately 2.8% a year over that time. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.
NZME May Have Challenges Growing The Dividend
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. NZME has impressed us by growing EPS at 6.6% per year over the past five years. Although per-share earnings are growing at a credible rate, the massive payout ratio may limit growth in the company's future dividend payments.
Our Thoughts On NZME's Dividend
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about NZME's payments, as there could be some issues with sustaining them into the future. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 1 warning sign for NZME that investors should know about before committing capital to this stock. Is NZME 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.