Don't Race Out To Buy Morneau Shepell Inc. (TSE:MSI) Just Because It's Going Ex-Dividend

Simply Wall St
·4 min read

Morneau Shepell Inc. (TSE:MSI) stock is about to trade ex-dividend in 3 days. This means that investors who purchase shares on or after the 29th of October will not receive the dividend, which will be paid on the 16th of November.

Morneau Shepell's next dividend payment will be CA$0.065 per share, on the back of last year when the company paid a total of CA$0.78 to shareholders. Based on the last year's worth of payments, Morneau Shepell stock has a trailing yield of around 2.8% on the current share price of CA$28.36. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Morneau Shepell can afford its dividend, and if the dividend could grow.

View our latest analysis for Morneau Shepell

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Morneau Shepell paid out 104% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 98% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Cash is slightly more important than profit from a dividend perspective, but given Morneau Shepell's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Morneau Shepell, with earnings per share up 8.0% on average over the last five years. Earnings per share have been growing comfortably, although unfortunately the company is paying out more of its profits than we're comfortable with over the long term.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Morneau Shepell's dividend payments per share have declined at 1.9% per year on average over the past 10 years, which is uninspiring.

The Bottom Line

From a dividend perspective, should investors buy or avoid Morneau Shepell? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Morneau Shepell.

With that being said, if you're still considering Morneau Shepell as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 4 warning signs for Morneau Shepell (of which 1 is a bit unpleasant!) you should know about.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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. 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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