Magellan Aerospace Corporation (TSE:MAL) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 19th of March in order to receive the dividend, which the company will pay on the 31st of March.
Magellan Aerospace's next dividend payment will be CA$0.10 per share, on the back of last year when the company paid a total of CA$0.42 to shareholders. Based on the last year's worth of payments, Magellan Aerospace has a trailing yield of 5.8% on the current stock price of CA$7.24. If you buy this business for its dividend, you should have an idea of whether Magellan Aerospace's dividend is reliable and sustainable. So we need to investigate whether Magellan Aerospace can afford its dividend, and if the dividend could grow.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Fortunately Magellan Aerospace's payout ratio is modest, at just 35% of profit. A useful secondary check can be to evaluate whether Magellan Aerospace generated enough free cash flow to afford its dividend. Dividends consumed 50% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's positive to see that Magellan Aerospace's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Magellan Aerospace, with earnings per share up 3.6% on average over the last five years. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last seven years, Magellan Aerospace has lifted its dividend by approximately 20% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
Is Magellan Aerospace an attractive dividend stock, or better left on the shelf? Earnings per share have been growing at a steady rate, and Magellan Aerospace paid out less than half its profits and more than half its free cash flow as dividends over the last year. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
On that note, you'll want to research what risks Magellan Aerospace is facing. In terms of investment risks, we've identified 2 warning signs with Magellan Aerospace and understanding them should be part of your investment process.
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.
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