Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see MSC Industrial Direct Co., Inc. (NYSE:MSM) is about to trade ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. This means that investors who purchase MSC Industrial Direct's shares on or after the 12th of July will not receive the dividend, which will be paid on the 27th of July.
The company's next dividend payment will be US$0.75 per share. Last year, in total, the company distributed US$3.00 to shareholders. Looking at the last 12 months of distributions, MSC Industrial Direct has a trailing yield of approximately 3.3% on its current stock price of $90.8. 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! We need to see whether the dividend is covered by earnings and if it's growing.
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. Its dividend payout ratio is 89% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be concerned if earnings began to decline. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (52%) of its free cash flow in the past year, which is within an average range for most companies.
It's positive to see that MSC Industrial Direct'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?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. So we're not too excited that MSC Industrial Direct's earnings are down 2.2% a year over the past five years.
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, MSC Industrial Direct has lifted its dividend by approximately 13% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. MSC Industrial Direct is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
To Sum It Up
Has MSC Industrial Direct got what it takes to maintain its dividend payments? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Although, if you're still interested in MSC Industrial Direct and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 3 warning signs with MSC Industrial Direct and understanding them should be part of your investment process.
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.
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. 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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