Melcor Developments Ltd. (TSE:MRD) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 19th of March will not receive this dividend, which will be paid on the 31st of March.
Melcor Developments's next dividend payment will be CA$0.10 per share, on the back of last year when the company paid a total of CA$0.48 to shareholders. Last year's total dividend payments show that Melcor Developments has a trailing yield of 3.8% on the current share price of CA$10.4. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are 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. That's why it's good to see Melcor Developments paying out a modest 44% of its earnings. 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. It paid out more than half (55%) of its free cash flow in the past year, which is within an average range for most companies.
It's positive to see that Melcor Developments'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?
Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Melcor Developments's earnings per share have dropped 19% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, Melcor Developments has increased its dividend at approximately 4.0% a year on average.
To Sum It Up
Has Melcor Developments got what it takes to maintain its dividend payments? Earnings per share have fallen significantly, although at least Melcor Developments paid out less than half of its profits and free cash flow over the last year, leaving some margin of safety. All things considered, we are not particularly enthused about Melcor Developments from a dividend perspective.
With that being said, if dividends aren't your biggest concern with Melcor Developments, you should know about the other risks facing this business. To help with this, we've discovered 5 warning signs for Melcor Developments (2 are a bit concerning!) that you ought to be aware of before buying the shares.
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.
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