Why It Might Not Make Sense To Buy Moneysupermarket.com Group PLC (LON:MONY) For Its Upcoming Dividend

By
Simply Wall St
Published
July 25, 2021
LSE:MONY
Source: Shutterstock

It looks like Moneysupermarket.com Group PLC (LON:MONY) is about to go ex-dividend in the next 3 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Moneysupermarket.com Group's shares before the 29th of July in order to be eligible for the dividend, which will be paid on the 3rd of September.

The company's next dividend payment will be UK£0.031 per share. Last year, in total, the company distributed UK£0.12 to shareholders. Calculating the last year's worth of payments shows that Moneysupermarket.com Group has a trailing yield of 4.4% on the current share price of £2.656. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Moneysupermarket.com Group can afford its dividend, and if the dividend could grow.

View our latest analysis for Moneysupermarket.com Group

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Moneysupermarket.com Group distributed an unsustainably high 111% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. The company paid out 92% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

As Moneysupermarket.com Group's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
LSE:MONY Historic Dividend July 25th 2021

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's not encouraging to see that Moneysupermarket.com Group's earnings are effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Moneysupermarket.com Group has increased its dividend at approximately 12% a year on average.

The Bottom Line

Has Moneysupermarket.com Group got what it takes to maintain its dividend payments? Not only are earnings per share flat, but Moneysupermarket.com Group is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Moneysupermarket.com Group. Our analysis shows 1 warning sign for Moneysupermarket.com Group and you should be aware of it before buying any shares.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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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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Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.