Metcash Limited (ASX:MTS) is about to trade ex-dividend in the next four days. Ex-dividend means that investors that purchase the stock on or after the 7th of July will not receive this dividend, which will be paid on the 5th of August.
Metcash's next dividend payment will be AU$0.065 per share. Last year, in total, the company distributed AU$0.13 to shareholders. Last year's total dividend payments show that Metcash has a trailing yield of 4.4% on the current share price of A$2.83. 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 investigate whether Metcash can afford its dividend, and if the dividend could grow.
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. Metcash paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Metcash didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Over the last year, it paid out dividends equivalent to 211% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Metcash intends to continue funding this dividend, or if it could be forced to the payment.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Metcash was unprofitable last year, but at least the general trend suggests its earnings have been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.
We'd also point out that Metcash issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Metcash has seen its dividend decline 6.7% per annum on average over the past ten years, which is not great to see.
To Sum It Up
Has Metcash got what it takes to maintain its dividend payments? It's hard to get used to Metcash paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. It's not that we think Metcash is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
With that in mind though, if the poor dividend characteristics of Metcash don't faze you, it's worth being mindful of the risks involved with this business. Case in point: We've spotted 2 warning signs for Metcash you should be aware of.
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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