Here's Why We're Wary Of Buying Magellan Financial Group's (ASX:MFG) For Its Upcoming Dividend

By
Simply Wall St
Published
August 19, 2021
ASX:MFG
Source: Shutterstock

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Magellan Financial Group Limited ( ASX:MFG ) is about to go ex-dividend in just three days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a 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. Thus, you can purchase Magellan Financial Group's shares before the 23rd of August in order to receive the dividend, which the company will pay on the 23rd of September.

The company's next dividend payment will be AU$1.14 per share, on the back of last year when the company paid a total of AU$2.11 to shareholders. Based on the last year's worth of payments, Magellan Financial Group stock has a trailing yield of around 4.7% on the current share price of A$45.1. If you buy this business for its dividend, you should have an idea of whether Magellan Financial Group's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Magellan Financial Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Magellan Financial Group paid out 138% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. It should be noted though, that following discussion with a company representative, Sarah Thorne, we wish to highlight that the company's dividend policy is to pay out between 90% and 95% of profits from its funds management business. Additionally, we would also like to note that the firm's 2021 earnings were significantly impacted by transactions costs resulting from strategic initiatives.

When a company pays out a dividend that is not well covered by profits, the dividend is generally seen as more vulnerable to being cut.

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

historic-dividend
ASX:MFG Historic Dividend August 19th 2021

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Magellan Financial Group earnings per share are up 3.2% per annum over the last five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Magellan Financial Group has lifted its dividend by approximately 64% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is Magellan Financial Group worth buying for its dividend? Magellan Financial Group has been growing earnings per share at a reasonable rate, but over the last year, its dividend was not well covered by earnings.

So if you're still interested in Magellan Financial Group you should be well informed on some of the risks facing this stock. To help with this, we've discovered 2 warning signs for Magellan Financial Group that you should be aware of before investing in their shares.

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.

If you decide to trade Magellan Financial Group, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers . Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account.Promoted

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.