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

The board of Medibank Private Limited (ASX:MPL) has announced that it will be paying its dividend of A$0.083 on the 5th of October, an increased payment from last year's comparable dividend. This takes the dividend yield to 4.2%, which shareholders will be pleased with.

View our latest analysis for Medibank Private

Medibank Private's Dividend Is Well Covered By Earnings

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. At the time of the last dividend payment, Medibank Private was paying out a very large proportion of what it was earning and 290% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

EPS is set to grow by 13.5% over the next year. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 76% - on the higher side, but we wouldn't necessarily say this is unsustainable.

Medibank Private Is Still Building Its Track Record

The dividend's track record has been pretty solid, but with only 8 years of history we want to see a few more years of history before making any solid conclusions. Since 2015, the dividend has gone from A$0.053 total annually to A$0.146. This means that it has been growing its distributions at 14% per annum over that time. Medibank Private has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

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. Earnings have grown at around 3.8% a year for the past five years, which isn't massive but still better than seeing them shrink. Medibank Private's earnings per share has barely grown, which is not ideal - perhaps this is why the company pays out the majority of its earnings to shareholders. 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.

Medibank Private's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Medibank Private's payments are rock solid. The payments are bit high to be considered sustainable, and the track record isn't the best. 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. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 1 warning sign for Medibank Private that investors should take into consideration. 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.