It Might Be Better To Avoid Morneau Shepell Inc.'s (TSE:MSI) Upcoming Dividend

Morneau Shepell Inc. (TSE:MSI) stock is about to trade ex-dividend in 3 days time. You will need to purchase shares before the 28th of May to receive the dividend, which will be paid on the 15th of June.

Morneau Shepell's upcoming dividend is CA$0.065 a share, following on from the last 12 months, when the company distributed a total of CA$0.78 per share to shareholders. Last year's total dividend payments show that Morneau Shepell has a trailing yield of 2.4% on the current share price of CA$32.41. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Morneau Shepell has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Morneau Shepell

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, Morneau Shepell paid out 106% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. A useful secondary check can be to evaluate whether Morneau Shepell generated enough free cash flow to afford its dividend. Over the past year it paid out 144% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cash is slightly more important than profit from a dividend perspective, but given Morneau Shepell's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

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

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. 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 Morneau Shepell, with earnings per share up 7.5% on average over the last five years. Earnings per share have been growing steadily, although a payout ratio this high suggests future growth is likely to slow, and the dividend may also be at risk of a cut if business enters a downturn.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Morneau Shepell has seen its dividend decline 1.9% per annum on average over the past ten years, which is not great to see.

The Bottom Line

Has Morneau Shepell got what it takes to maintain its dividend payments? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. Bottom line: Morneau Shepell has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Morneau Shepell and want to know more, you'll find it very useful to know what risks this stock faces. Our analysis shows 4 warning signs for Morneau Shepell that we strongly recommend you have a look at before investing in the company.

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. Thank you for reading.