Here's What You Should Know About Morneau Shepell Inc.'s (TSE:MSI) 2.5% Dividend Yield

Today we'll take a closer look at Morneau Shepell Inc. (TSE:MSI) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

A 2.5% yield is nothing to get excited about, but investors probably think the long payment history suggests Morneau Shepell has some staying power. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Explore this interactive chart for our latest analysis on Morneau Shepell!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Morneau Shepell paid out 97% of its profit as dividends. With a payout ratio this high, we'd say its dividend is not well covered by earnings. This may be fine if earnings are growing, but it might not take much of a downturn for the dividend to come under pressure.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. The company paid out 66% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Morneau Shepell has available to meet other needs. It's good to see that while Morneau Shepell's dividends were not well covered by profits, at least they are affordable from a free cash flow perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

We update our data on Morneau Shepell every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Morneau Shepell's dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past 10-year period, the first annual payment was CA$0.9 in 2011, compared to CA$0.8 last year. The dividend has shrunk at around 1.9% a year during that period.

We struggle to make a case for buying Morneau Shepell for its dividend, given that payments have shrunk over the past 10 years.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. It's good to see Morneau Shepell has been growing its earnings per share at 19% a year over the past five years. Although earnings per share are up nicely Morneau Shepell is paying out 97% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.

Conclusion

To summarise, shareholders should always check that Morneau Shepell's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're not keen on the fact that Morneau Shepell paid out such a high percentage of its income, although its cashflow is in better shape. That said, we were glad to see it growing earnings and paying a fairly consistent dividend. Ultimately, Morneau Shepell comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

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. Just as an example, we've come accross 3 warning signs for Morneau Shepell you should be aware of, and 1 of them doesn't sit too well with us.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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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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