Morgan Advanced Materials' (LON:MGAM) Shareholders Will Receive A Bigger Dividend Than Last Year

The board of Morgan Advanced Materials plc (LON:MGAM) has announced that it will be paying its dividend of £0.053 on the 18th of November, an increased payment from last year's comparable dividend. This will take the dividend yield to an attractive 4.4%, providing a nice boost to shareholder returns.

Our analysis indicates that MGAM is potentially undervalued!

Morgan Advanced Materials' Payment Has Solid Earnings Coverage

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Morgan Advanced Materials was earning enough to cover the previous dividend, but it was paying out quite a large proportion of its free cash flows. By paying out so much of its cash flows, this could indicate that the company has limited opportunities for investment and growth.

The next year is set to see EPS grow by 29.1%. If the dividend continues on this path, the payout ratio could be 31% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The annual payment during the last 10 years was £0.0925 in 2012, and the most recent fiscal year payment was £0.112. This works out to be a compound annual growth rate (CAGR) of approximately 1.9% a year over that time. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.

Dividend Growth Is Doubtful

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Morgan Advanced Materials has seen earnings per share falling at 5.9% per year over the last five years. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this can turn into a longer term trend.

Our Thoughts On Morgan Advanced Materials' Dividend

In summary, while it's always good to see the dividend being raised, we don't think Morgan Advanced Materials' payments are rock solid. The low payout ratio is a redeeming feature, but generally we are not too happy with the payments Morgan Advanced Materials has been making. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 1 warning sign for Morgan Advanced Materials that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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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.