Stock Analysis

You Have To Love Mount Gibson Iron Limited's (ASX:MGX) Dividend

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ASX:MGX
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Today we'll take a closer look at Mount Gibson Iron Limited (ASX:MGX) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Mount Gibson Iron is a new dividend aristocrat in the making. It sure looks interesting on these metrics - but there's always more to the story. There are a few simple ways to reduce the risks of buying Mount Gibson Iron for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Mount Gibson Iron!

historic-dividend
ASX:MGX Historic Dividend November 30th 2020

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Mount Gibson Iron paid out 41% of its profit as dividends, over the trailing twelve month period. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase the payout ratio over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Mount Gibson Iron's cash payout ratio in the last year was 38%, which suggests dividends were well covered by cash generated by the business. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

While the above analysis focuses on dividends relative to a company's earnings, we do note Mount Gibson Iron's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Mount Gibson Iron's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. The first recorded dividend for Mount Gibson Iron, in the last decade, was nine years ago. It's good to see that Mount Gibson Iron has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was AU$0.04 in 2011, compared to AU$0.03 last year. The dividend has shrunk at around 3.1% a year during that period. Mount Gibson Iron's dividend has been cut sharply at least once, so it hasn't fallen by 3.1% every year, but this is a decent approximation of the long term change.

A shrinking dividend over a nine-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. It's good to see Mount Gibson Iron has been growing its earnings per share at 65% a year over the past five years. Earnings per share have rocketed in recent times, and we like that the company is retaining more than half of its earnings to reinvest. However, always remember that very few companies can grow at double digit rates forever.

Conclusion

To summarise, shareholders should always check that Mount Gibson Iron's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Mount Gibson Iron has low and conservative payout ratios. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. All things considered, Mount Gibson Iron looks like a strong prospect. At the right valuation, it could be something special.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 3 warning signs for Mount Gibson Iron that investors need to be conscious of moving forward.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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