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Should Income Investors Look At MJ Gleeson plc (LON:GLE) Before Its Ex-Dividend?

Simply Wall St

MJ Gleeson plc (LON:GLE) is about to trade ex-dividend in the next 3 days. You can purchase shares before the 14th of November in order to receive the dividend, which the company will pay on the 13th of December.

MJ Gleeson's next dividend payment will be UK£0.2 per share, on the back of last year when the company paid a total of UK£0.3 to shareholders. Last year's total dividend payments show that MJ Gleeson has a trailing yield of 4.2% on the current share price of £8.28. If you buy this business for its dividend, you should have an idea of whether MJ Gleeson's dividend is reliable and sustainable. As a result, readers should always check whether MJ Gleeson has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for MJ Gleeson

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. MJ Gleeson is paying out an acceptable 56% of its profit, a common payout level among most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out an unsustainably high 280% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

MJ Gleeson paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were MJ Gleeson to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

LSE:GLE Historical Dividend Yield, November 10th 2019

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, MJ Gleeson's earnings per share have been growing at 13% a year for the past five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. MJ Gleeson has delivered an average of 27% per year annual increase in its dividend, based on the past eight years of dividend payments. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

To Sum It Up

From a dividend perspective, should investors buy or avoid MJ Gleeson? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note MJ Gleeson paid out a much higher percentage of its free cash flow, which makes us uncomfortable. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.

Wondering what the future holds for MJ Gleeson? See what the five analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.