McMillan Shakespeare (ASX:MMS) Is Paying Out A Larger Dividend Than Last Year

The board of McMillan Shakespeare Limited (ASX:MMS) has announced that it will be paying its dividend of A$0.58 on the 24th of March, an increased payment from last year's comparable dividend. This takes the dividend yield to 9.8%, which shareholders will be pleased with.

View our latest analysis for McMillan Shakespeare

McMillan Shakespeare's Earnings Easily Cover The Distributions

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, the company's dividend was higher than its profits, and made up 89% of cash flows. This indicates that the company could be more focused on returning cash to shareholders than reinvesting to grow the business.

EPS is set to grow by 34.3% over the next year. If recent patterns in the dividend continues, the payout ratio in 12 months could be 95% which is a bit high but can definitely be sustainable.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was A$0.50 in 2013, and the most recent fiscal year payment was A$1.48. This works out to be a compound annual growth rate (CAGR) of approximately 11% a year over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

Dividend Growth May Be Hard To Achieve

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. McMillan Shakespeare has impressed us by growing EPS at 7.6% per year over the past five years. Although per-share earnings are growing at a credible rate, the massive payout ratio may limit growth in the company's future dividend payments.

McMillan Shakespeare's Dividend Doesn't Look Sustainable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The track record isn't great, and the payments are a bit high to be considered sustainable. We would be a touch cautious of relying on this stock primarily for the dividend income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 2 warning signs for McMillan Shakespeare that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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