Marshalls (LON:MSLH) Is Increasing Its Dividend To £0.057

Marshalls plc (LON:MSLH) will increase its dividend from last year's comparable payment on the 1st of December to £0.057. This will take the annual payment to 5.1% of the stock price, which is above what most companies in the industry pay.

View our latest analysis for Marshalls

Marshalls' Dividend Is Well Covered By Earnings

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Marshalls' dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 456% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

Looking forward, earnings per share is forecast to rise by 85.1% over the next year. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 52% which would be quite comfortable going to take the dividend forward.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of £0.0525 in 2012 to the most recent total annual payment of £0.192. This works out to be a compound annual growth rate (CAGR) of approximately 14% a year over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

Dividend Growth May Be Hard To Achieve

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Marshalls has seen earnings per share falling at 4.4% per year over the last five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

An additional note is that the company has been raising capital by issuing stock equal to 27% of shares outstanding in the last 12 months. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

Marshalls' Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think Marshalls will make a great income stock. The track record isn't great, and the payments are a bit high to be considered sustainable. We would be a touch cautious of relying on this stock primarily for the dividend income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 3 warning signs for Marshalls that investors should know about before committing capital to this stock. Is Marshalls not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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