The board of Morses Club PLC (LON:MCL) has announced that it will pay a dividend on the 11th of February, with investors receiving UK£0.01 per share. This means the annual payment is 6.5% of the current stock price, which is above the average for the industry.
Morses Club's Payment Has Solid Earnings Coverage
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before making this announcement, the company's dividend was much higher than its earnings. This situation certainly isn't ideal, and could place significant strain on the balance sheet if it continues.
According to analysts, EPS should be several times higher next year. If the dividend continues along recent trends, we estimate the payout ratio will be 54%, which would make us comfortable with the dividend's sustainability, despite the levels currently being elevated.
Morses Club's Dividend Has Lacked Consistency
It's comforting to see that Morses Club has been paying a dividend for a number of years now, however it has been cut at least once in that time. This suggests that the dividend might not be the most reliable. Since 2017, the first annual payment was UK£0.064, compared to the most recent full-year payment of UK£0.03. The dividend has fallen 53% over that period. A company that decreases its dividend over time generally isn't what we are looking for.
The Dividend Has Limited Growth Potential
Dividends have been going in the wrong direction, so we definitely want to see a different trend in the earnings per share. Over the past five years, it looks as though Morses Club's EPS has declined at around 30% a year. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn't be feeling too comfortable.
We're Not Big Fans Of Morses Club's Dividend
Overall, while some might be pleased that the dividend wasn't cut, we think this may help Morses Club make more consistent payments in the future. The company's earnings aren't high enough to be making such big distributions, and it isn't backed up by strong growth or consistency either. The dividend doesn't inspire confidence that it will provide solid income in the future.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 5 warning signs for Morses Club that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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