McGrath (ASX:MEA) Is Paying Out A Larger Dividend Than Last Year

McGrath Limited's (ASX:MEA) dividend will be increasing on the 23rd of March to AU$0.025, with investors receiving 400% more than last year. This will take the dividend yield from 3.3% to 5.8%, providing a nice boost to shareholder returns.

View our latest analysis for McGrath

McGrath's Payment Has Solid Earnings Coverage

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before making this announcement, McGrath was easily earning enough to cover the dividend. As a result, a large proportion of what it earned was being reinvested back into the business.

Looking forward, earnings per share could rise by 6.1% over the next year if the trend from the last few years continues. If the dividend continues on this path, the payout ratio could be 24% by next year, which we think can be pretty sustainable going forward.

McGrath's Dividend Has Lacked Consistency

Looking back, McGrath's dividend hasn't been particularly consistent. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. The dividend has gone from AU$0.035 in 2016 to the most recent annual payment of AU$0.02. This works out to be a decline of approximately 8.9% per year over that time. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

McGrath Could Grow Its Dividend

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. It's encouraging to see McGrath has been growing its earnings per share at 6.1% a year over the past five years. McGrath definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

In Summary

Overall, it's great to see the dividend being raised and that it is still in a sustainable range. While the payout ratios are a good sign, we are less enthusiastic about the company's dividend record. This looks like it could be a good dividend stock going forward, but we would note that the payout ratio has been at higher levels in the past so it could happen again.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 3 warning signs for McGrath that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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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.