Melcor Developments Ltd. (TSE:MRD) stock is about to trade ex-dividend in 4 days. Ex-dividend means that investors that purchase the stock on or after the 14th of September will not receive this dividend, which will be paid on the 30th of September.
Melcor Developments’s next dividend payment will be CA$0.08 per share. Last year, in total, the company distributed CA$0.32 to shareholders. Based on the last year’s worth of payments, Melcor Developments has a trailing yield of 5.1% on the current stock price of CA$6.32. 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! So we need to investigate whether Melcor Developments 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. Melcor Developments paid out a comfortable 38% of its profit last year. 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 28% of its free cash flow in the past year.
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?
When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. 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. Such a sharp decline casts doubt on the future sustainability of the dividend.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Melcor Developments has delivered 2.5% dividend growth per year on average over the past 10 years.
The Bottom Line
Is Melcor Developments worth buying for its dividend? Melcor Developments has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. While it does have some good things going for it, we’re a bit ambivalent and it would take more to convince us of Melcor Developments’s dividend merits.
While it’s tempting to invest in Melcor Developments for the dividends alone, you should always be mindful of the risks involved. We’ve identified 5 warning signs with Melcor Developments (at least 2 which don’t sit too well with us), and understanding these should be part of your investment process.
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.
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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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