Is It Worth Considering Metcash Limited (ASX:MTS) For Its Upcoming Dividend?

Metcash Limited (ASX:MTS) is about to trade ex-dividend in the next two days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase Metcash's shares on or after the 16th of July will not receive the dividend, which will be paid on the 27th of August.

The company's next dividend payment will be AU$0.085 per share, and in the last 12 months, the company paid a total of AU$0.17 per share. Based on the last year's worth of payments, Metcash has a trailing yield of 4.6% on the current stock price of AU$3.68. 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! As a result, readers should always check whether Metcash has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Metcash

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 76% 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 worried about the risk of a drop in earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Fortunately, it paid out only 42% of its free cash flow in the past year.

It's positive to see that Metcash'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?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Metcash earnings per share are up 2.6% per annum over the last five years. A payout ratio of 76% looks like a tacit signal from management that reinvestment opportunities in the business are low. In line with limited earnings growth in recent years, this is not the most appealing combination.

We'd also point out that Metcash issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Metcash has seen its dividend decline 0.8% per annum on average over the past 10 years, which is not great to see.

Final Takeaway

Should investors buy Metcash for the upcoming dividend? Earnings per share growth has been modest and Metcash paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. To summarise, Metcash looks okay on this analysis, although it doesn't appear a stand-out opportunity.

While it's tempting to invest in Metcash for the dividends alone, you should always be mindful of the risks involved. Every company has risks, and we've spotted 2 warning signs for Metcash you should know about.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com