Don't Buy Public Joint Stock Company Magnit (MCX:MGNT) For Its Next Dividend Without Doing These Checks

It looks like Public Joint Stock Company Magnit (MCX:MGNT) is about to go ex-dividend in the next three days. This means that investors who purchase shares on or after the 6th of January will not receive the dividend, which will be paid on the 1st of January.

Magnit's next dividend payment will be ₽245 per share, and in the last 12 months, the company paid a total of ₽402 per share. Calculating the last year's worth of payments shows that Magnit has a trailing yield of 7.1% on the current share price of RUB5668.5. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Magnit has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Magnit

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Magnit 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. A useful secondary check can be to evaluate whether Magnit generated enough free cash flow to afford its dividend. It paid out more than half (70%) of its free cash flow in the past year, which is within an average range for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Magnit fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Magnit's earnings per share have fallen at approximately 19% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Magnit has lifted its dividend by approximately 37% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Magnit is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Is Magnit an attractive dividend stock, or better left on the shelf? Earnings per share have been shrinking in recent times. Worse, Magnit's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that in mind though, if the poor dividend characteristics of Magnit don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 2 warning signs for Magnit and you should be aware of them before buying any shares.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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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