It looks like Moelis & Company (NYSE:MC) is about to go ex-dividend in the next 2 days. Ex-dividend means that investors that purchase the stock on or after the 7th of November will not receive this dividend, which will be paid on the 13th of December.
Moelis’s next dividend payment will be US$0.5 per share. Last year, in total, the company distributed US$3.3 to shareholders. Calculating the last year’s worth of payments shows that Moelis has a trailing yield of 9.2% on the current share price of $35.18. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it’s growing.
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. Its dividend payout ratio is 80% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth We’d be concerned if earnings began to decline.
When a company paid out less in dividends than it earned in profit, this generally suggests its dividend is affordable. The lower the % of its profit that it pays out, the greater the margin of safety for the dividend if the business enters a downturn.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we’re discomforted by Moelis’s 13% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the last five years, Moelis has lifted its dividend by approximately 32% a year on average. That’s intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Moelis is already paying out 80% of its profits, and with shrinking earnings we think it’s unlikely that this dividend will grow quickly in the future.
To Sum It Up
Should investors buy Moelis for the upcoming dividend? We’re not overly enthused to see Moelis’s earnings in retreat at the same time as the company is paying out more than half of its earnings as dividends to shareholders. These characteristics don’t generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its dividend.
Curious what other investors think of Moelis? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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