Marcus' (NYSE:MCS) Shareholders Will Receive A Bigger Dividend Than Last Year

The board of The Marcus Corporation (NYSE:MCS) has announced that the dividend on 15th of September will be increased to $0.07, which will be 40% higher than last year's payment of $0.05 which covered the same period. This will take the dividend yield to an attractive 1.2%, providing a nice boost to shareholder returns.

Check out our latest analysis for Marcus

Marcus Doesn't Earn Enough To Cover Its Payments

A big dividend yield for a few years doesn't mean much if it can't be sustained. While Marcus is not profitable, it is paying out less than 75% of its free cash flow, which means that there is plenty left over for reinvestment into the business. In general, cash flows are more important than the more traditional measures of profit so we feel pretty comfortable with the dividend at this level.

Over the next year, EPS is forecast to grow rapidly. If recent patterns in the dividend continues, we would start to get a bit worried, with the payout ratio possibly reaching 116%.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The dividend has gone from an annual total of $0.34 in 2013 to the most recent total annual payment of $0.20. This works out to be a decline of approximately 5.2% per year over that time. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

Dividend Growth Potential Is Shaky

Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. Over the past five years, it looks as though Marcus' EPS has declined at around 41% a year. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn't be feeling too comfortable.

Marcus' Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think Marcus will make a great income stock. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. This company is not in the top tier of income providing stocks.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from competition or inflation. Very few businesses see earnings consistently shrink year after year in perpetuity though, and so it might be worth seeing what the 3 analysts we track are forecasting for the future. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.