Don't Buy Morneau Shepell Inc. (TSE:MSI) For Its Next Dividend Without Doing These Checks

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Morneau Shepell Inc. (TSE:MSI) is about to go ex-dividend in just 3 days. You will need to purchase shares before the 30th of December to receive the dividend, which will be paid on the 15th of January.

Morneau Shepell's next dividend payment will be CA$0.065 per share. Last year, in total, the company distributed CA$0.78 to shareholders. Last year's total dividend payments show that Morneau Shepell has a trailing yield of 2.6% on the current share price of CA$30.33. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Morneau Shepell

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Morneau Shepell distributed an unsustainably high 113% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 90% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Cash is slightly more important than profit from a dividend perspective, but given Morneau Shepell's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Morneau Shepell earnings per share are up 6.2% per annum over the last five years. Earnings per share have been growing steadily, although a payout ratio this high suggests future growth is likely to slow, and the dividend may also be at risk of a cut if business enters a downturn.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Morneau Shepell's dividend payments per share have declined at 1.9% per year on average over the past 10 years, which is uninspiring.

To Sum It Up

Should investors buy Morneau Shepell for the upcoming dividend? Morneau Shepell is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. It's not that we think Morneau Shepell is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in Morneau Shepell despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 3 warning signs with Morneau Shepell (at least 1 which is a bit concerning), and understanding them should be part of your investment process.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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.
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