Do These 3 Checks Before Buying McMillan Shakespeare Limited (ASX:MMS) For Its Upcoming Dividend

It looks like McMillan Shakespeare Limited (ASX:MMS) is about to go ex-dividend in the next four days. This means that investors who purchase shares on or after the 11th of March will not receive the dividend, which will be paid on the 26th of March.

McMillan Shakespeare's upcoming dividend is AU$0.30 a share, following on from the last 12 months, when the company distributed a total of AU$0.60 per share to shareholders. Based on the last year's worth of payments, McMillan Shakespeare has a trailing yield of 4.8% on the current stock price of A$12.46. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether McMillan Shakespeare has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for McMillan Shakespeare

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. McMillan Shakespeare paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If McMillan Shakespeare didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. The good news is it paid out just 10% of its free cash flow in the last year.

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. McMillan Shakespeare was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. McMillan Shakespeare has delivered an average of 9.7% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Get our latest analysis on McMillan Shakespeare's balance sheet health here.

To Sum It Up

Is McMillan Shakespeare worth buying for its dividend? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

So if you're still interested in McMillan Shakespeare despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 2 warning signs with McMillan Shakespeare (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

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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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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