The board of Monadelphous Group Limited (ASX:MND) has announced that the dividend on 30th of September will be increased to A$0.25, which will be 19% higher than last year's payment of A$0.21 which covered the same period. This will take the dividend yield to an attractive 3.4%, providing a nice boost to shareholder returns.
Monadelphous Group's Earnings Easily Cover The Distributions
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. The last payment made up 94% of earnings, but cash flows were much higher. This leaves plenty of cash for reinvestment into the business.
Looking forward, earnings per share is forecast to rise by 62.4% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 57%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2012, the annual payment back then was A$1.25, compared to the most recent full-year payment of A$0.45. The dividend has shrunk at around 9.7% a year during that period. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.
Dividend Growth May Be Hard To Come By
Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. Monadelphous Group has seen earnings per share falling at 5.1% per year over the last five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.
In summary, while it's always good to see the dividend being raised, we don't think Monadelphous Group's payments are rock solid. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We don't think Monadelphous Group is a great stock to add to your portfolio if income is your focus.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 1 warning sign for Monadelphous Group that you should be aware of before investing. Is Monadelphous Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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