Medibank Private's (ASX:MPL) Shareholders Will Receive A Bigger Dividend Than Last Year

Medibank Private Limited's (ASX:MPL) dividend will be increasing on the 24th of March to AU$0.061, with investors receiving 5.2% more than last year. This takes the annual payment to 4.1% of the current stock price, which is about average for the industry.

View our latest analysis for Medibank Private

Medibank Private's Dividend Is Well Covered By Earnings

We aren't too impressed by dividend yields unless they can be sustained over time. Before making this announcement, Medibank Private's was paying out quite a large proportion of earnings and 76% of free cash flows. This indicates that the company is more focused on returning cash to shareholders than growing the business, but we don't think that there are necessarily signs that the dividend might be unsustainable.

Earnings per share is forecast to rise by 1.7% over the next year. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 86%. This is definitely on the higher side, but we wouldn't necessarily say this is unsustainable.

Medibank Private Is Still Building Its Track Record

Medibank Private's dividend has been pretty stable for a little while now, but we will continue to be cautious until it has been demonstrated for a few more years. The dividend has gone from AU$0.053 in 2015 to the most recent annual payment of AU$0.13. This implies that the company grew its distributions at a yearly rate of about 13% over that duration. It is always nice to see strong dividend growth, but with such a short payment history we wouldn't be inclined to rely on it until a longer track record can be developed.

Medibank Private May Find It Hard To Grow The Dividend

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. However, Medibank Private's EPS was effectively flat over the past five years, which could stop the company from paying more every year. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. That's fine as far as it goes, but we're less enthusiastic as this often signals that the dividend is likely to grow slower in the future.

In Summary

Overall, we always like to see the dividend being raised, but we don't think Medibank Private will make a great income stock. The track record isn't great, and the payments are a bit high to be considered sustainable. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 1 warning sign for Medibank Private 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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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.