Don't Race Out To Buy Magna International Inc. (TSE:MG) Just Because It's Going Ex-Dividend
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Magna International Inc. (TSE:MG) is about to trade ex-dividend in the next 2 days. This means that investors who purchase shares on or after the 20th of August will not receive the dividend, which will be paid on the 4th of September.
Magna International's next dividend payment will be CA$0.40 per share, and in the last 12 months, the company paid a total of CA$1.60 per share. Calculating the last year's worth of payments shows that Magna International has a trailing yield of 3.0% on the current share price of CA$69.72. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
View our latest analysis for Magna International
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. Magna International paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out 80% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Magna International reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Magna International has increased its dividend at approximately 24% a year on average.
Remember, you can always get a snapshot of Magna International's financial health, by checking our visualisation of its financial health, here.
To Sum It Up
Is Magna International an attractive dividend stock, or better left on the shelf? It's hard to get used to Magna International paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. 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 Magna International despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 4 warning signs for Magna International that we strongly recommend you have a look at before investing in the company.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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.
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