McMillan Shakespeare Limited (ASX:MMS) will pay a dividend of A$0.77 on the 26th of September. However, the dividend yield of 7.6% is still a decent boost to shareholder returns.
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A big dividend yield for a few years doesn’t mean much if it can’t be sustained. Before this announcement, McMillan Shakespeare was paying out 108% of what it was earning, and not generating any free cash flows either. This high of a dividend payment could start to put pressure on the balance sheet in the future.
Earnings per share is forecast to rise by 28.4% over the next year. If recent patterns in the dividend continues, the payout ratio in 12 months could be 93% which is a bit high but can definitely be sustainable.
Check out our latest analysis for McMillan Shakespeare
The company’s dividend history has been marked by instability, with at least one cut in the last 10 years. The annual payment during the last 10 years was A$0.52 in 2015, and the most recent fiscal year payment was A$1.48. This works out to be a compound annual growth rate (CAGR) of approximately 11% a year over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. We are encouraged to see that McMillan Shakespeare has grown earnings per share at 143% per year over the past five years. Although earnings per share is up nicely McMillan Shakespeare is paying out 108% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.
In summary, dividends being cut isn’t ideal, however it can bring the payment into a more sustainable range. In general, the distributions are a little bit higher than we would like, but we can’t ignore the fact the quickly growing earnings gives this stock great potential in the future. We would be a touch cautious of relying on this stock primarily for the dividend income.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we’ve picked out 3 warning signs for McMillan Shakespeare that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated 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.