Here's What We Like About Melrose Industries' (LON:MRO) Upcoming Dividend
Readers hoping to buy Melrose Industries PLC (LON:MRO) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Therefore, if you purchase Melrose Industries' shares on or after the 13th of August, you won't be eligible to receive the dividend, when it is paid on the 25th of September.
The company's next dividend payment will be UK£0.027 per share, on the back of last year when the company paid a total of UK£0.072 to shareholders. Last year's total dividend payments show that Melrose Industries has a trailing yield of 1.5% on the current share price of UK£4.854. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Melrose Industries paid out more than half (59%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Melrose Industries generated enough free cash flow to afford its dividend. Fortunately, it paid out only 47% of its free cash flow in the past year.
It's positive to see that Melrose Industries's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
View our latest analysis for Melrose Industries
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Melrose Industries has grown its earnings rapidly, up 72% a year for the past five years. The current payout ratio suggests a good balance between rewarding shareholders with dividends, and reinvesting in growth. With a reasonable payout ratio, profits being reinvested, and some earnings growth, Melrose Industries could have strong prospects for future increases to the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Melrose Industries has seen its dividend decline 21% per annum on average over the past 10 years, which is not great to see. Melrose Industries is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
To Sum It Up
Is Melrose Industries an attractive dividend stock, or better left on the shelf? Melrose Industries's growing earnings per share and conservative payout ratios make for a decent combination. We also like that it paid out a lower percentage of its cash flow. It's a promising combination that should mark this company worthy of closer attention.
In light of that, while Melrose Industries has an appealing dividend, it's worth knowing the risks involved with this stock. Be aware that Melrose Industries is showing 2 warning signs in our investment analysis, and 1 of those is significant...
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
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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.