Morgan Stanley (NYSE:MS) has announced that it will be increasing its dividend on the 13th of August to US$0.70. This takes the annual payment to 1.9% of the current stock price, which is about average for the industry.
Morgan Stanley's Earnings Easily Cover the Distributions
Unless the payments are sustainable, the dividend yield doesn't mean too much. Morgan Stanley is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.
Over the next year, EPS is forecast to fall by 5.9%. If the dividend continues along recent trends, we estimate the payout ratio could be 29%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.
Morgan Stanley Has A Solid Track Record
The company has a sustained record of paying dividends with very little fluctuation. The dividend has gone from US$0.20 in 2011 to the most recent annual payment of US$2.80. This implies that the company grew its distributions at a yearly rate of about 30% over that duration. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.
The Dividend Looks Likely To Grow
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Morgan Stanley has seen EPS rising for the last five years, at 28% per annum. Rapid earnings growth and a low payout ratio suggest this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.
The company has also been raising capital by issuing stock equal to 16% of shares outstanding in the last 12 months. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.
Overall, we always like to see the dividend being raised, but we don't think Morgan Stanley will make a great income stock. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We don't think Morgan Stanley is a great stock to add to your portfolio if income is your focus.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come across 4 warning signs for Morgan Stanley you should be aware of, and 2 of them are a bit unpleasant. We have also put together a list of global stocks with a solid dividend.
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What are the risks and opportunities for Morgan Stanley?
Trading at 1.2% below our estimate of its fair value
Earnings are forecast to grow 9.32% per year
Significant insider selling over the past 3 months
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Morgan Stanley, a financial holding company, provides various financial products and services to corporations, governments, financial institutions, and individuals in the Americas, Europe, the Middle East, Africa, and Asia.
Adequate balance sheet average dividend payer.