Stock Analysis

MotorCycle Holdings (ASX:MTO) Will Pay A Larger Dividend Than Last Year At AU$0.12

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The board of MotorCycle Holdings Limited (ASX:MTO) has announced that it will be increasing its dividend on the 6th of April to AU$0.12. This takes the dividend yield to 7.5%, which shareholders will be pleased with.

Check out our latest analysis for MotorCycle Holdings

MotorCycle Holdings' Earnings Easily Cover the Distributions

A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, MotorCycle Holdings' dividend was only 57% of earnings, however it was paying out 108% of free cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

Looking forward, earnings per share is forecast to fall by 9.6% over the next year. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 72%, which is comfortable for the company to continue in the future.

ASX:MTO Historic Dividend February 28th 2022

MotorCycle Holdings' Dividend Has Lacked Consistency

MotorCycle Holdings has been paying dividends for a while, but the track record isn't stellar. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. The dividend has gone from AU$0.15 in 2017 to the most recent annual payment of AU$0.24. This implies that the company grew its distributions at a yearly rate of about 9.9% over that duration. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. MotorCycle Holdings might have put its house in order since then, but we remain cautious.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. We are encouraged to see that MotorCycle Holdings has grown earnings per share at 14% per year over the past five years. The lack of cash flows does make us a bit cautious though, especially when it comes to the future of the dividend.

In Summary

Overall, we always like to see the dividend being raised, but we don't think MotorCycle Holdings will make a great income stock. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, MotorCycle Holdings has 2 warning signs (and 1 which is significant) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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