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

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.

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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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.