Yahoo Finance Metcash's (ASX:MTS) Dividend Will Be Reduced To A$0.085
Metcash Limited's (ASX:MTS) dividend is being reduced from last year's payment covering the same period to A$0.085 on the 27th of August. The dividend yield of 4.7% is still a nice boost to shareholder returns, despite the cut.
Check out our latest analysis for Metcash
Metcash's Payment Has Solid Earnings Coverage
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Metcash's dividend made up quite a large proportion of earnings but only 54% of free cash flows. This leaves plenty of cash for reinvestment into the business.
Looking forward, earnings per share is forecast to rise by 18.6% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 73%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
Dividend Volatility
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2014, the annual payment back then was A$0.185, compared to the most recent full-year payment of A$0.17. The dividend has shrunk at a rate of less than 1% a year over this period. 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 May Be Hard To Achieve
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Earnings have grown at around 2.6% a year for the past five years, which isn't massive but still better than seeing them shrink. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.
We should note that Metcash has issued stock equal to 13% of shares outstanding. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.
In Summary
Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We don't think Metcash is a great stock to add to your portfolio if income is your focus.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 2 warning signs for Metcash that investors need to be conscious of moving forward. Is Metcash not quite the opportunity you were looking for? Why not check out our selection of top 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.
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