Air New Zealand Limited (NZSE:AIR) is reducing its dividend from last year's comparable payment to NZ$0.0125 on the 19th of March. However, the dividend yield of 4.7% is still a decent boost to shareholder returns.

See our latest analysis for Air New Zealand

Air New Zealand's Future Dividend Projections Appear Well Covered By Earnings

If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, Air New Zealand was paying out quite a large proportion of both earnings and cash flow, with the dividend being 532% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

Looking forward, earnings per share is forecast to rise by 73.2% over the next year. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 34% which would be quite comfortable going to take the dividend forward.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2015, the dividend has gone from NZ$0.095 total annually to NZ$0.03. This works out to a decline of approximately 68% over that time. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

The Dividend Has Limited Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Air New Zealand's EPS has fallen by approximately 29% per year during the past five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.

Air New Zealand's Dividend Doesn't Look Sustainable

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. The track record isn't great, and the payments are a bit high to be considered sustainable. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 2 warning signs for Air New Zealand that investors should know about before committing capital to this stock. Is Air New Zealand not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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