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It Might Be Better To Avoid Meggitt PLC's (LON:MGGT) Upcoming 0.9% Dividend

Simply Wall St

Meggitt PLC (LON:MGGT) is about to trade ex-dividend in the next 3 days. You will need to purchase shares before the 5th of September to receive the dividend, which will be paid on the 4th of October.

Meggitt's upcoming dividend is UK£0.056 a share, following on from the last 12 months, when the company distributed a total of UK£0.17 per share to shareholders. Based on the last year's worth of payments, Meggitt stock has a trailing yield of around 2.7% on the current share price of £6.19. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Meggitt can afford its dividend, and if the dividend could grow.

See our latest analysis for Meggitt

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Meggitt paid out 90% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year, it paid out more than three-quarters (79%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's good to see that while Meggitt's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

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

LSE:MGGT Historical Dividend Yield, September 1st 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Meggitt's earnings per share have fallen at approximately 8.6% a year over the previous 5 years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Meggitt has lifted its dividend by approximately 7.0% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Meggitt is already paying out 90% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is Meggitt an attractive dividend stock, or better left on the shelf? Earnings per share have been in decline, which is not encouraging. Additionally, Meggitt is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not that we think Meggitt is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Curious what other investors think of Meggitt? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .

If you're in the market for dividend stocks, we recommend checking our list of top 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.