Today we'll take a closer look at Matthews International Corporation (NASDAQ:MATW) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
A 2.0% yield is nothing to get excited about, but investors probably think the long payment history suggests Matthews International has some staying power. The company also returned around 0.5% of its market capitalisation to shareholders in the form of stock buybacks over the past year. That said, the recent jump in the share price will make Matthews International's dividend yield look smaller, even though the company prospects could be improving. Some simple research can reduce the risk of buying Matthews International for its dividend - read on to learn more.
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. 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. While Matthews International pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.
Matthews International paid out 15% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable.
We update our data on Matthews International every 24 hours, so you can always get our latest analysis of its financial health, here.
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. For the purpose of this article, we only scrutinise the last decade of Matthews International's dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past 10-year period, the first annual payment was US$0.3 in 2011, compared to US$0.9 last year. This works out to be a compound annual growth rate (CAGR) of approximately 12% a year over that time.
Dividends have been growing pretty quickly, and even more impressively, they haven't experienced any notable falls during this period.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Matthews International's EPS have fallen by approximately 47% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.
Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. It's not great to see earnings per share shrinking. The dividends have been relatively consistent, but we wonder for how much longer this will be true. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Matthews International out there.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come accross 4 warning signs for Matthews International you should be aware of, and 1 of them shouldn't be ignored.
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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