Medibank Private's (ASX:MPL) Upcoming Dividend Will Be Larger Than Last Year's

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 will take the dividend yield to an attractive 4.1%, providing a nice boost to shareholder returns.

Check out our latest analysis for Medibank Private

Medibank Private's Dividend Is Well Covered By Earnings

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, Medibank Private was paying out quite a large proportion of both earnings and cash flow, with the dividend being 290% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

Earnings per share is forecast to rise by 13.4% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could reach 76%, which is on the higher side, but certainly still feasible.

Medibank Private Doesn't Have A Long Payment History

Even though the company has been paying a consistent dividend for a while, we would like to see a few more years before we feel comfortable relying on it. The annual payment during the last 8 years was A$0.053 in 2015, and the most recent fiscal year payment was A$0.146. This implies that the company grew its distributions at a yearly rate of about 14% over that duration. 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.

The Dividend's Growth Prospects Are Limited

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Earnings per share has been crawling upwards at 3.8% per year. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.

Medibank Private's Dividend Doesn't Look Sustainable

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. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 1 warning sign for Medibank Private that you should be aware of before investing. Is Medibank Private not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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