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Why It Might Not Make Sense To Buy Maintel Holdings Plc (LON:MAI) For Its Upcoming Dividend

Simply Wall St

Readers hoping to buy Maintel Holdings Plc (LON:MAI) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 12th of September, you won't be eligible to receive this dividend, when it is paid on the 4th of October.

Maintel Holdings's next dividend payment will be UK£0.15 per share, and in the last 12 months, the company paid a total of UK£0.34 per share. Based on the last year's worth of payments, Maintel Holdings stock has a trailing yield of around 8.6% on the current share price of £4. 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.

View our latest analysis for Maintel Holdings

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. Maintel Holdings distributed an unsustainably high 125% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. Over the last year it paid out 57% of its free cash flow as dividends, within the usual range for most companies.

It's good to see that while Maintel Holdings's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Maintel Holdings paid out over the last 12 months.

AIM:MAI Historical Dividend Yield, September 7th 2019

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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Maintel Holdings earnings per share are up 2.0% per annum over the last five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Maintel Holdings has lifted its dividend by approximately 20% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Should investors buy Maintel Holdings for the upcoming dividend? While earnings per share have been growing slowly, Maintel Holdings is paying out an uncomfortably high percentage of its earnings. However it did pay out a lower percentage of its cashflow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Curious about whether Maintel Holdings has been able to consistently generate growth? Here's a chart of its historical revenue and earnings growth.

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.

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.