Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Morneau Shepell Inc. (TSE:MSI) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 30th of July in order to be eligible for this dividend, which will be paid on the 17th of August.
Morneau Shepell's next dividend payment will be CA$0.065 per share, and in the last 12 months, the company paid a total of CA$0.78 per share. Calculating the last year's worth of payments shows that Morneau Shepell has a trailing yield of 2.5% on the current share price of CA$30.6. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Morneau Shepell can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Morneau Shepell paid out 106% 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. Morneau Shepell paid out more free cash flow than it generated - 144%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Cash is slightly more important than profit from a dividend perspective, but given Morneau Shepell's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Morneau Shepell earnings per share are up 7.5% per annum over the last five years. Earnings per share have been growing comfortably, although unfortunately the company is paying out more of its profits than we're comfortable with over the long term.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Morneau Shepell has seen its dividend decline 1.9% per annum on average over the past 10 years, which is not great to see.
The Bottom Line
Should investors buy Morneau Shepell for the upcoming dividend? Morneau Shepell is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
With that being said, if you're still considering Morneau Shepell as an investment, you'll find it beneficial to know what risks this stock is facing. We've identified 4 warning signs with Morneau Shepell (at least 1 which can't be ignored), and understanding these 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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