Is Middlesex Water Company (NASDAQ:MSEX) A Smart Pick For Income Investors?

Is Middlesex Water Company (NASDAQ:MSEX) a good dividend stock? How would you know? A dividend paying company with growing earnings can be rewarding in the long term. 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 slim 1.7% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Middlesex Water could have potential. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Explore this interactive chart for our latest analysis on Middlesex Water!
NasdaqGS:MSEX Historical Dividend Yield, April 26th 2019
NasdaqGS:MSEX Historical Dividend Yield, April 26th 2019

Payout ratios

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. So we need to be form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Middlesex Water paid out 46% of its profit as dividends, over the trailing twelve month period. This is medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Plus, there is room to increase the payout ratio over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Unfortunately, while Middlesex Water pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it’s not ideal from a dividend perspective.

Is Middlesex Water’s Balance Sheet Risky?

As Middlesex Water has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks.

A quick way to check a company’s financial situation uses these two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures a company’s total debt load relative to its earnings (lower = less debt), while net interest cover measures the company’s ability to pay the interest on its debt (higher = greater ability to pay interest costs). Middlesex Water has net debt of more than 3x its EBITDA. Judicious use of debt can enhance shareholder returns, but also adds to the risk if something goes awry.

Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. Middlesex Water has EBIT of 5.06 times its interest expense, which we think is adequate.

Consider getting our latest analysis on Middlesex Water’s financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Middlesex Water has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was US$0.71 in 2009, compared to US$0.96 last year. Dividends per share have grown at approximately 3.1% per year over this time.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Middlesex Water has grown its earnings per share at 14% per annum over the past five years. A company paying out less than a quarter of its earnings as dividends, and growing earnings at more than 10% per annum, looks to be right in the cusp of its growth phase. At the right price, we might be interested.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Middlesex Water has a low payout ratio, which we like, although it paid out virtually all of its generated cash. That said, we were glad to see it growing earnings and paying a fairly consistent dividend. Overall we think Middlesex Water is an interesting dividend stock, although it could be better.

Now, if you want to look closer, it would be worth checking out our free research on Middlesex Water management tenure, salary, and performance.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.