Stock Analysis

Magellan Aerospace (TSE:MAL) Has Announced That Its Dividend Will Be Reduced To CA$0.025

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Magellan Aerospace Corporation (TSE:MAL) has announced that on 30th of December, it will be paying a dividend ofCA$0.025, which a reduction from last year's comparable dividend. However, the dividend yield of 1.4% still remains in a typical range for the industry.

View our latest analysis for Magellan Aerospace

Magellan Aerospace's Earnings Easily Cover The Distributions

Unless the payments are sustainable, the dividend yield doesn't mean too much. Even though Magellan Aerospace isn't generating a profit, it is generating healthy free cash flows that easily cover the dividend. This gives us some comfort about the level of the dividend payments.

Looking forward, earnings per share is forecast to rise exponentially over the next year. If the dividend extends its recent trend, estimates say the dividend could reach 34%, which we would be comfortable to see continuing.

TSX:MAL Historic Dividend December 1st 2022

Magellan Aerospace's Dividend Has Lacked Consistency

It's comforting to see that Magellan Aerospace 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 2013, the dividend has gone from CA$0.12 total annually to CA$0.10. The dividend has shrunk at around 2.0% a year during that period. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

The Dividend Has Limited Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Over the past five years, it looks as though Magellan Aerospace's EPS has declined at around 53% a year. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.

Magellan Aerospace's Dividend Doesn't Look Sustainable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. This company is not in the top tier of income providing stocks.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Now, if you want to look closer, it would be worth checking out our free research on Magellan Aerospace management tenure, salary, and performance. 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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