Don't Race Out To Buy Morneau Shepell Inc. (TSE:MSI) Just Because It's Going Ex-Dividend

Morneau Shepell Inc. (TSE:MSI) stock is about to trade ex-dividend in three days. Ex-dividend means that investors that purchase the stock on or after the 25th of February will not receive this dividend, which will be paid on the 15th of March.

Morneau Shepell's upcoming dividend is CA$0.065 a share, following on from the last 12 months, when the company distributed a total of CA$0.78 per share to shareholders. Looking at the last 12 months of distributions, Morneau Shepell has a trailing yield of approximately 2.4% on its current stock price of CA$32.51. 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! So we need to investigate whether Morneau Shepell can afford its dividend, and if the dividend could grow.

View our latest analysis for Morneau Shepell

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Morneau Shepell distributed an unsustainably high 113% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. The company paid out 90% of its free cash flow over the last year, which we think is outside the ideal range 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.

As Morneau Shepell's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Morneau Shepell, with earnings per share up 6.2% on average over the last five years. Earnings per share have been growing comfortably, although unfortunately the company is paying out more of its profits than we're comfortable with over the long term.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Morneau Shepell has seen its dividend decline 1.9% per annum on average over the past 10 years, which is not great to see.

The Bottom Line

Should investors buy Morneau Shepell for the upcoming dividend? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. 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. To that end, you should learn about the 2 warning signs we've spotted with Morneau Shepell (including 1 which is a bit concerning).

If you're in the market for dividend stocks, we recommend checking our list of top 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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