M.P. Evans Group plc (LON:MPE) Investors Should Think About This Before Buying It For Its Dividend

Could M.P. Evans Group plc (LON:MPE) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. 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 M.P. Evans Group has some staying power. The company also returned around 0.5% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple research can reduce the risk of buying M.P. Evans Group for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on M.P. Evans Group!

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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 114% of M.P. Evans Group's profits were paid out as dividends in the last 12 months. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Unfortunately, while M.P. Evans Group pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

We update our data on M.P. Evans Group every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of M.P. Evans Group's dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was US$0.1 in 2011, compared to US$0.2 last year. Dividends per share have grown at approximately 6.6% per year over this time. The dividends haven't grown at precisely 6.6% every year, but this is a useful way to average out the historical rate of growth.

A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? M.P. Evans Group's earnings per share have shrunk at 12% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and M.P. Evans Group's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that M.P. Evans Group'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 a bit uncomfortable with M.P. Evans Group paying out a high percentage of both its cashflow and earnings. Earnings per share are down, and M.P. Evans Group's dividend has been cut at least once in the past, which is disappointing. In this analysis, M.P. Evans Group doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 1 warning sign for M.P. Evans Group that investors should take into consideration.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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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