It looks like Melcor Developments Ltd. (TSE:MRD) is about to go ex-dividend in the next three days. Ex-dividend means that investors that purchase the stock on or after the 14th of December will not receive this dividend, which will be paid on the 31st of December.
Melcor Developments's next dividend payment will be CA$0.08 per share, on the back of last year when the company paid a total of CA$0.32 to shareholders. Calculating the last year's worth of payments shows that Melcor Developments has a trailing yield of 4.0% on the current share price of CA$8.07. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
View our latest analysis for Melcor Developments
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Fortunately Melcor Developments's payout ratio is modest, at just 44% of profit. A useful secondary check can be to evaluate whether Melcor Developments generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 29% of the free cash flow it generated, which is a comfortable payout ratio.
It's positive to see that Melcor Developments'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 how much of its profit Melcor Developments paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Melcor Developments's earnings per share have fallen at approximately 23% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Melcor Developments has lifted its dividend by approximately 0.6% a year on average.
The Bottom Line
From a dividend perspective, should investors buy or avoid Melcor Developments? Earnings per share are down meaningfully, although at least the company is paying out a low and conservative percentage of both its earnings and cash flow. It's definitely not great to see earnings falling, but at least there may be some buffer before the dividend needs to be cut. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Melcor Developments's dividend merits.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Every company has risks, and we've spotted 6 warning signs for Melcor Developments (of which 2 are concerning!) you should know about.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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About TSX:MRD
Melcor Developments
Operates as a real estate development company in the United States and Canada.
Adequate balance sheet slight.
