Should MJ Gleeson plc (LON:GLE) Be Part Of Your Dividend Portfolio?
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Today we'll take a closer look at MJ Gleeson plc (LON:GLE) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
With a eight-year payment history and a 3.8% yield, many investors probably find MJ Gleeson intriguing. We'd agree the yield does look enticing. There are a few simple ways to reduce the risks of buying MJ Gleeson for its dividend, and we'll go through these below.
Explore this interactive chart for our latest analysis on MJ Gleeson!
Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to be form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 50% of MJ Gleeson's profits were paid out as dividends in the last 12 months. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. MJ Gleeson paid out 84% of its cash flow last year. This may be sustainable but it does not leave much of a buffer for unexpected circumstances.
Consider getting our latest analysis on MJ Gleeson's financial position here.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the last decade of data, we can see that MJ Gleeson paid its first dividend at least eight years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once by more than 20%, and we're cautious about the consistency of its dividend across a full economic cycle. During the past eight-year period, the first annual payment was UK£0.05 in 2011, compared to UK£0.32 last year. Dividends per share have grown at approximately 26% per year over this time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.
It's not great to see that the payment has been cut in the past. We're generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see MJ Gleeson has grown its earnings per share at 29% per annum over the past five years. With recent, rapid earnings per share growth and a payout ratio of 50%, this business could be an interesting prospect if growth can be maintained.
Conclusion
Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. MJ Gleeson's is paying out more than half its income as dividends, but at least the dividend is covered both by reported earnings and cashflow. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than MJ Gleeson out there.
Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 5 analysts we track are forecasting for MJ Gleeson for free with public analyst estimates for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
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.
