Magellan Aerospace (TSE:MAL) Is Paying Out Less In Dividends Than Last Year

Magellan Aerospace Corporation (TSE:MAL) is reducing its dividend from last year's comparable payment to CA$0.025 on the 30th of December. The dividend yield will be in the average range for the industry at 1.4%.

Our analysis indicates that MAL is potentially undervalued!

Magellan Aerospace's Dividend Is Well Covered By Earnings

We aren't too impressed by dividend yields unless they can be sustained over time. Even though Magellan Aerospace isn't generating a profit, it is generating healthy free cash flows that easily cover the dividend. We generally think that cash flow is more important than accounting measures of profit, so we are fairly comfortable with the dividend at this level.

Analysts expect a massive rise in earnings per share in the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 34%, so there isn't too much pressure on the dividend.

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. The dividend has gone from an annual total of CA$0.12 in 2013 to the most recent total annual payment of CA$0.10. This works out to be a decline of approximately 2.0% per year over that time. A company that decreases its dividend over time generally isn't what we are looking for.

Dividend Growth Potential Is Shaky

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though Magellan Aerospace's EPS has declined at around 53% a year. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. 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 payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We don't think Magellan Aerospace is a great stock to add to your portfolio if income is your focus.

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. See if management have their own wealth at stake, by checking insider shareholdings in Magellan Aerospace stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.