Is It Worth Considering MSC Industrial Direct Co., Inc. (NYSE:MSM) For Its Upcoming Dividend?
MSC Industrial Direct Co., Inc. (NYSE:MSM) stock is about to trade ex-dividend in 4 days. You can purchase shares before the 30th of November in order to receive the dividend, which the company will pay on the 15th of December.
The upcoming dividend for MSC Industrial Direct will put a total of US$3.50 per share in shareholders' pockets, up from last year's total dividends of US$3.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether MSC Industrial Direct has been able to grow its dividends, or if the dividend might be cut.
See our latest analysis for MSC Industrial Direct
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. MSC Industrial Direct is paying out an acceptable 66% of its profit, a common payout level among most companies. 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. Fortunately, it paid out only 48% of its free cash flow in the past year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at MSC Industrial Direct, with earnings per share up 3.8% on average over the last five years. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, MSC Industrial Direct has lifted its dividend by approximately 14% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
Final Takeaway
Is MSC Industrial Direct an attractive dividend stock, or better left on the shelf? While earnings per share growth has been modest, MSC Industrial Direct's dividend payouts are around an average level; without a sharp change in earnings we feel that the dividend is likely somewhat sustainable. Pleasingly the company paid out a conservatively low percentage of its 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 MSC Industrial Direct's dividend merits.
On that note, you'll want to research what risks MSC Industrial Direct is facing. To help with this, we've discovered 2 warning signs for MSC Industrial Direct that you should be aware of before investing in their 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.
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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