Mount Gibson Iron Limited (ASX:MGX) has announced it will be reducing its dividend payable on the 6th of October to AU$0.02. This payment takes the dividend yield to 3.2%, which only provides a modest boost to overall returns.
Mount Gibson Iron's Dividend Is Well Covered By Earnings
Even a low dividend yield can be attractive if it is sustained for years on end. Mount Gibson Iron is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.
EPS is set to fall by 5.8% over the next 12 months if recent trends continue. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 38%, which is definitely feasible to continue.
The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2011, the first annual payment was AU$0.04, compared to the most recent full-year payment of AU$0.02. This works out to be a decline of approximately 6.7% per year over that time. A company that decreases its dividend over time generally isn't what we are looking for.
Dividend Growth Is Doubtful
With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS is growing. Over the past five years, it looks as though Mount Gibson Iron's EPS has declined at around 5.8% a year. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits.
Mount Gibson Iron's Dividend Doesn't Look Sustainable
Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think Mount Gibson Iron is a great stock to add to your portfolio if income is your focus.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 4 warning signs for Mount Gibson Iron (of which 1 is concerning!) you should know about. We have also put together a list of global stocks with a solid dividend.
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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.
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