We Wouldn't Be Too Quick To Buy Monadelphous Group Limited (ASX:MND) Before It Goes Ex-Dividend

Monadelphous Group Limited (ASX:MND) stock is about to trade ex-dividend in 3 days. This means that investors who purchase shares on or after the 10th of September will not receive the dividend, which will be paid on the 2nd of October.

Monadelphous Group's next dividend payment will be AU$0.13 per share. Last year, in total, the company distributed AU$0.26 to shareholders. Looking at the last 12 months of distributions, Monadelphous Group has a trailing yield of approximately 2.4% on its current stock price of A$10.93. If you buy this business for its dividend, you should have an idea of whether Monadelphous Group's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Monadelphous Group

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 Monadelphous Group paid out 91% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Monadelphous Group generated enough free cash flow to afford its dividend. Fortunately, it paid out only 39% of its free cash flow in the past year.

It's good to see that while Monadelphous Group's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

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

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. With that in mind, we're discomforted by Monadelphous Group's 19% 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. Monadelphous Group's dividend payments per share have declined at 11% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Final Takeaway

Has Monadelphous Group got what it takes to maintain its dividend payments? It's not a great combination to see a company with earnings in decline and paying out 91% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Monadelphous Group's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

So if you're still interested in Monadelphous Group despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Every company has risks, and we've spotted 1 warning sign for Monadelphous Group you should know about.

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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