Stock Analysis

McGrath (ASX:MEA) Will Pay A Dividend Of A$0.01

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ASX:MEA
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McGrath Limited (ASX:MEA) will pay a dividend of A$0.01 on the 20th of September. This makes the dividend yield 4.3%, which will augment investor returns quite nicely.

View our latest analysis for McGrath

McGrath's Payment Has Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. However, prior to this announcement, McGrath's dividend was comfortably covered by both cash flow and earnings. 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 15.3% over the next year if the trend from the last few years continues. Assuming the dividend continues along recent trends, we think the payout ratio could be 45% by next year, which is in a pretty sustainable range.

historic-dividend
ASX:MEA Historic Dividend August 30th 2022

McGrath's Dividend Has Lacked Consistency

It's comforting to see that McGrath has been paying a dividend for a number of years now, however it has been cut at least once in that time. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2016, the dividend has gone from A$0.035 total annually to A$0.02. Doing the maths, this is a decline of about 8.9% per year. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

The Dividend Looks Likely To Grow

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 that McGrath has been growing its earnings per share at 15% a year over the past five years. Growth in EPS bodes well for the dividend, as does the low payout ratio that the company is currently reporting.

McGrath Looks Like A Great Dividend Stock

Overall, we think that this is a great income investment, and we think that maintaining the dividend this year may have been a conservative choice. Earnings are easily covering distributions, and the company is generating plenty of cash. All of these factors considered, we think this has solid potential as a dividend stock.

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 McGrath that investors need to be conscious of moving forward. Is McGrath not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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About ASX:MEA

McGrath

McGrath Limited operates as an integrated residential real estate services company in Australia.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation4
Future Growth0
Past Performance3
Financial Health6
Dividends3

Read more about these checks in the individual report sections or in our analysis model.

Flawless balance sheet and good value.