McMillan Shakespeare (ASX:MMS) Will Pay A Dividend Of A$0.77

McMillan Shakespeare Limited (ASX:MMS) has announced that it will pay a dividend of A$0.77 per share on the 26th of September. The yield is still above the industry average at 7.6%.

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McMillan Shakespeare's Projected Earnings Seem Likely To Cover Future Distributions

If the payments aren't sustainable, a high yield for a few years won't matter that much. Based on the last payment, earnings were actually smaller than the dividend, and the company was actually spending more cash than it was making. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.

Earnings per share is forecast to rise by 28.4% over the next year. If recent patterns in the dividend continues, the payout ratio in 12 months could be 93% which is a bit high but can definitely be sustainable.

Check out our latest analysis for McMillan Shakespeare

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The annual payment during the last 10 years was A$0.52 in 2015, and the most recent fiscal year payment was A$1.48. This means that it has been growing its distributions at 11% per annum over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

Dividend Growth Could Be Constrained

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. McMillan Shakespeare has seen EPS rising for the last five years, at 143% per annum. Although earnings per share is up nicely McMillan Shakespeare is paying out 108% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.

McMillan Shakespeare's Dividend Doesn't Look Sustainable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. We don't think McMillan Shakespeare is a great stock to add to your portfolio if income is your focus.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 3 warning signs for McMillan Shakespeare that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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