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Do Investors Have Good Reason To Be Wary Of MEGARON Spólka Akcyjna's (WSE:MEG) 7.9% Dividend Yield?

Simply Wall St

Is MEGARON Spólka Akcyjna (WSE:MEG) a good dividend stock? How would you know? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if MEGARON Spólka Akcyjna is a new dividend aristocrat in the making. It sure looks interesting on these metrics - but there's always more to the story . Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Click the interactive chart for our full dividend analysis

WSE:MEG Historical Dividend Yield, May 16th 2019

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Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to be form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, MEGARON Spólka Akcyjna paid out 67% of its profit as dividends. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. MEGARON Spólka Akcyjna paid out 329% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely.


We update our data on MEGARON Spólka Akcyjna every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. The first recorded dividend for MEGARON Spólka Akcyjna, in the last decade, was eight years ago. It's good to see that MEGARON Spólka Akcyjna has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past eight-year period, the first annual payment was zł1.16 in 2011, compared to zł0.95 last year. The dividend has shrunk at around -2.5% a year during that period. MEGARON Spólka Akcyjna's dividend hasn't shrunk linearly at -2.5% per annum, but the CAGR is a useful estimate of the historical rate of change.


Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Over the past five years, it looks as though MEGARON Spólka Akcyjna's EPS have declined at around 5.0% a year. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. MEGARON Spólka Akcyjna gets a pass on its dividend payout ratio, but it paid out virtually all of its cash flow as dividends. This may just be a one-off, but we'd keep an eye on this. Earnings per share are down, and MEGARON Spólka Akcyjna's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with MEGARON Spólka Akcyjna from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

See if management have their own wealth at stake, by checking insider shareholdings in MEGARON Spólka Akcyjna stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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.