Is Moneysupermarket.com Group PLC (LON:MONY) A Good Fit For Your Dividend Portfolio?

Could Moneysupermarket.com Group PLC (LON:MONY) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

In this case, Moneysupermarket.com Group likely looks attractive to investors, given its 4.7% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. Some simple analysis can reduce the risk of holding Moneysupermarket.com Group for its dividend, and we'll focus on the most important aspects below.

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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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 74% of Moneysupermarket.com Group's profits were paid out as dividends in the last 12 months. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Moneysupermarket.com Group paid out 70% of its cash flow as dividends last year, which is within a reasonable range for the average corporation. It's positive to see that Moneysupermarket.com Group'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.

With a strong net cash balance, Moneysupermarket.com Group investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of Moneysupermarket.com Group's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Moneysupermarket.com Group has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past 10-year period, the first annual payment was UK£0.04 in 2010, compared to UK£0.1 last year. This works out to be a compound annual growth rate (CAGR) of approximately 13% a year over that time.

With rapid dividend growth and no notable cuts to the dividend over a lengthy period of time, we think this company has a lot going for it.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Moneysupermarket.com Group has grown its earnings per share at 6.9% per annum over the past five years. Earnings per share are growing at an acceptable rate, although the company is paying out more than half of its profits, which we think could constrain its ability to reinvest in its business.

Conclusion

To summarise, shareholders should always check that Moneysupermarket.com Group's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Moneysupermarket.com Group's is paying out more than half its income as dividends, but at least the dividend is covered by both reported earnings and cashflow. Second, earnings growth has been mediocre, but at least the dividends have been relatively stable. In sum, we find it hard to get excited about Moneysupermarket.com Group from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

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. Earnings growth generally bodes well for the future value of company dividend payments. See if the 11 Moneysupermarket.com Group analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

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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