Should You Buy MTY Food Group Inc. (TSE:MTY) For Its Upcoming Dividend?

It looks like MTY Food Group Inc. (TSE:MTY) is about to go ex-dividend in the next 2 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase MTY Food Group's shares before the 5th of November in order to be eligible for the dividend, which will be paid on the 15th of November.

The company's next dividend payment will be CA$0.28 per share. Last year, in total, the company distributed CA$1.12 to shareholders. Based on the last year's worth of payments, MTY Food Group has a trailing yield of 2.5% on the current stock price of CA$45.42. If you buy this business for its dividend, you should have an idea of whether MTY Food Group's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for MTY Food Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately MTY Food Group's payout ratio is modest, at just 27% of profit. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Luckily it paid out just 14% of its free cash flow last year.

It's positive to see that MTY Food Group's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that MTY Food Group's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. Earnings per share growth in recent times has not been a standout. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. MTY Food Group has delivered 13% dividend growth per year on average over the past 10 years.

The Bottom Line

Should investors buy MTY Food Group for the upcoming dividend? Earnings per share have been flat over this time, but we're intrigued to see that MTY Food Group is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. Generally we like to see both low payout ratios and strong earnings per share growth, but MTY Food Group is halfway there. MTY Food Group looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

On that note, you'll want to research what risks MTY Food Group is facing. For example, we've found 2 warning signs for MTY Food Group that we recommend you consider before investing in the business.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are 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.