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Is It Worth Considering Metcash Limited (ASX:MTS) For Its Upcoming Dividend?

Simply Wall St

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Metcash Limited (ASX:MTS) is about to go ex-dividend in just 4 days. Ex-dividend means that investors that purchase the stock on or after the 17th of December will not receive this dividend, which will be paid on the 23rd of January.

Metcash's next dividend payment will be AU$0.06 per share. Last year, in total, the company distributed AU$0.13 to shareholders. Looking at the last 12 months of distributions, Metcash has a trailing yield of approximately 4.9% on its current stock price of A$2.65. If you buy this business for its dividend, you should have an idea of whether Metcash's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Metcash

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's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. 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 more than three-quarters (80%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

ASX:MTS Historical Dividend Yield, December 12th 2019

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Metcash reported a loss last year, but at least the general trend suggests its income has 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.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Metcash has seen its dividend decline 5.9% per annum on average over the past ten years, which is not great to see.

Remember, you can always get a snapshot of Metcash's financial health, by checking our visualisation of its financial health, here.

The Bottom Line

Is Metcash an attractive dividend stock, or better left on the shelf? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Metcash's dividend merits.

Wondering what the future holds for Metcash? See what the 11 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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.

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. Thank you for reading.