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Main Street Capital Corporation (NYSE:MAIN) will increase its dividend from last year's comparable payment on the 15th of September to $0.215. This takes the dividend yield to 5.9%, which shareholders will be pleased with.
Main Street Capital's Earnings Easily Cover The Distributions
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Main Street Capital is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
Looking forward, earnings per share is forecast to fall by 6.5% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could reach 86%, which is definitely on the higher side.
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2012, the dividend has gone from $1.62 total annually to $2.66. This works out to be a compound annual growth rate (CAGR) of approximately 5.1% a year over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Main Street Capital might have put its house in order since then, but we remain cautious.
Dividend Growth May Be Hard To Achieve
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Earnings have grown at around 3.1% a year for the past five years, which isn't massive but still better than seeing them shrink. Earnings growth is slow, but on the plus side, the dividend payout ratio is low and dividends could grow faster than earnings, if the company decides to increase its payout ratio.
Our Thoughts On Main Street Capital's Dividend
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think Main Street Capital is a great stock to add to your portfolio if income is your focus.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Main Street Capital has 6 warning signs (and 2 which don't sit too well with us) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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