Stock Analysis

Does MultiChoice Group Limited (JSE:MCG) Have A Place In Your Dividend Stock Portfolio?

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JSE:MCG
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Today we'll take a closer look at MultiChoice Group Limited (JSE:MCG) 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. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

MultiChoice Group pays a 4.4% dividend yield, and has been paying dividends for the past two years. It's certainly an attractive yield, but readers are likely curious about its staying power. The company also bought back stock during the year, equivalent to approximately 1.7% of the company's market capitalisation at the time. Some simple analysis can reduce the risk of holding MultiChoice Group for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on MultiChoice Group!

historic-dividend
JSE:MCG Historic Dividend March 29th 2021

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, MultiChoice Group paid out 164% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Of the free cash flow it generated last year, MultiChoice Group paid out 35% as dividends, suggesting the dividend is affordable. It's good to see that while MultiChoice Group's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

While the above analysis focuses on dividends relative to a company's earnings, we do note MultiChoice Group's strong net cash position, which will let it pay larger dividends for a time, should it choose.

We update our data on MultiChoice Group every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

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. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. During the past two-year period, the first annual payment was R5.7 in 2019, compared to R5.7 last year. The dividend has shrunk at a rate of less than 1% a year over this period.

We struggle to make a case for buying MultiChoice Group for its dividend, given that payments have shrunk over the past two years.

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. Over the past five years, it looks as though MultiChoice Group's EPS have declined at around 11% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and MultiChoice Group's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that MultiChoice Group's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with its high payout ratio, although at least the dividend was covered by free cash flow. Earnings per share have been falling, and the company has a relatively short dividend history - shorter than we like, anyway. In summary, MultiChoice Group has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 1 warning sign for MultiChoice Group that investors should take into consideration.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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