It Might Not Be A Great Idea To Buy Monadelphous Group Limited (ASX:MND) For Its Next Dividend

It looks like Monadelphous Group Limited (ASX:MND) is about to go ex-dividend in the next two days. You will need to purchase shares before the 4th of March to receive the dividend, which will be paid on the 26th of March.

Monadelphous Group's next dividend payment will be AU$0.24 per share, and in the last 12 months, the company paid a total of AU$0.37 per share. Based on the last year's worth of payments, Monadelphous Group stock has a trailing yield of around 3.1% on the current share price of A$11.8. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Monadelphous Group

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. It paid out 88% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. 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. Dividends consumed 61% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's positive to see that Monadelphous Group'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.

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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Monadelphous Group's earnings per share have dropped 18% a year over 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 7.8% per year on average over the past 10 years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

Final Takeaway

From a dividend perspective, should investors buy or avoid Monadelphous Group? While earnings per share are shrinking, it's encouraging to see that at least Monadelphous Group's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. It's not that we think Monadelphous Group is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of Monadelphous Group don't faze you, it's worth being mindful of the risks involved with this business. Case in point: We've spotted 2 warning signs for Monadelphous Group you should be aware of.

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.

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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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