It looks like McMillan Shakespeare Limited (ASX:MMS) is about to go ex-dividend in the next 3 days. This means that investors who purchase shares on or after the 5th of March will not receive the dividend, which will be paid on the 20th of March.
McMillan Shakespeare's next dividend payment will be AU$0.34 per share, and in the last 12 months, the company paid a total of AU$0.74 per share. Last year's total dividend payments show that McMillan Shakespeare has a trailing yield of 6.8% on the current share price of A$10.83. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. McMillan Shakespeare paid out 95% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Fortunately, it paid out only 49% of its free cash flow in the past year.
It's good to see that while McMillan Shakespeare's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're not enthused to see that McMillan Shakespeare's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last ten years, McMillan Shakespeare has lifted its dividend by approximately 15% a year on average.
Is McMillan Shakespeare an attractive dividend stock, or better left on the shelf? McMillan Shakespeare's earnings per share are effectively flat, and it is paying out just 49% of its cash flow but 95% of its income. All things considered, we are not particularly enthused about McMillan Shakespeare from a dividend perspective.
Wondering what the future holds for McMillan Shakespeare? See what the six analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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