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The board of Mercer International Inc. (NASDAQ:MERC) has announced that it will pay a dividend on the 3rd of July, with investors receiving $0.075 per share. This makes the dividend yield 7.6%, which will augment investor returns quite nicely.
While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Mercer International's stock price has reduced by 39% in the last 3 months, which is not ideal for investors and can explain a sharp increase in the dividend yield.
Mercer International'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. Mercer International is not generating a profit, but its free cash flows easily cover the dividend, leaving plenty for reinvestment in the business. This gives us some comfort about the level of the dividend payments.
Looking forward, earnings per share is forecast to expand by 92.8% over the next year. It's encouraging to see things moving in the right direction, but this probably won't be enough for the company to turn a profit. The healthy cash flows are definitely a good sign though, so we wouldn't panic just yet, especially with the earnings growing.
Check out our latest analysis for Mercer International
Dividend Volatility
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2015, the dividend has gone from $0.46 total annually to $0.30. Doing the maths, this is a decline of about 4.2% per year. A company that decreases its dividend over time generally isn't what we are looking for.
The Dividend Has Limited Growth Potential
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Mercer International's earnings per share has shrunk at 25% a year over the past five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.
Mercer International's Dividend Doesn't Look Sustainable
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We don't think Mercer International is a great stock to add to your portfolio if income is your focus.