The board of Mercury General Corporation (NYSE:MCY) has announced that it will pay a dividend of US$0.64 per share on the 30th of June. Based on this payment, the dividend yield on the company’s stock will be 4.9%, which is an attractive boost to shareholder returns.
Mercury General’s Distributions May Be Difficult To Sustain
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Mercury General is not generating a profit, but its free cash flows easily cover the dividend, leaving plenty for reinvestment in the business. In general, cash flows are more important than the more traditional measures of profit so we feel pretty comfortable with the dividend at this level.
Looking forward, earnings per share could rise by 27.7% over the next year if the trend from the last few years continues. We like to see the company moving towards profitability, but this probably won’t be enough for it to post positive net income this year. However, the positive cash flow ratio gives us some comfort about the sustainability of the dividend.
Mercury General Has A Solid Track Record
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2012, the first annual payment was US$2.40, compared to the most recent full-year payment of US$2.54. Its dividends have grown at less than 1% per annum over this time frame. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.
The Company Could Face Some Challenges Growing The Dividend
Some investors will be chomping at the bit to buy some of the company’s stock based on its dividend history. Mercury General has impressed us by growing EPS at 28% per year over the past five years. The company hasn’t been turning a profit, but it running in the right direction. If this trajectory continues and the company can turn a profit soon, it could bode well for the dividend going forward.
In summary, while it’s good to see that the dividend hasn’t been cut, we are a bit cautious about Mercury General’s payments, as there could be some issues with sustaining them into the future. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We don’t think Mercury General is a great stock to add to your portfolio if income is your focus.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we’ve picked out 1 warning sign for Mercury General that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated 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.