MSC Industrial Direct (NYSE:MSM) Is Increasing Its Dividend To $0.85

The board of MSC Industrial Direct Co., Inc. (NYSE:MSM) has announced that the dividend on 27th of November will be increased to $0.85, which will be 2.4% higher than last year's payment of $0.83 which covered the same period. This will take the annual payment to 4.0% of the stock price, which is above what most companies in the industry pay.

View our latest analysis for MSC Industrial Direct

MSC Industrial Direct's Payment Could Potentially Have Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. The last dividend was quite easily covered by MSC Industrial Direct's earnings. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.

The next year is set to see EPS grow by 41.4%. If the dividend continues along recent trends, we estimate the payout ratio will be 50%, which is in the range that makes us comfortable with the sustainability of the dividend.

MSC Industrial Direct Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. The dividend has gone from an annual total of $1.32 in 2014 to the most recent total annual payment of $3.32. This works out to be a compound annual growth rate (CAGR) of approximately 9.7% a year over that time. Dividends have grown at a reasonable rate over this period, and without any major cuts in the payment over time, we think this is an attractive combination as it provides a nice boost to shareholder returns.

Dividend Growth May Be Hard To Achieve

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Unfortunately things aren't as good as they seem. Unfortunately, MSC Industrial Direct's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year.

Our Thoughts On MSC Industrial Direct's Dividend

Overall, it's great to see the dividend being raised and that it is still in a sustainable range. The earnings coverage is acceptable for now, but with earnings on the decline we would definitely keep an eye on the payout ratio. The dividend looks okay, but there have been some issues in the past, so we would be a little bit cautious.

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. Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from competition or inflation. See if the 9 analysts are forecasting a turnaround in our free collection of analyst estimates here. Is MSC Industrial Direct not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.