Yahoo Finance Dividend Investors: Don't Be Too Quick To Buy Melcor Developments Ltd. (TSE:MRD) For Its Upcoming Dividend
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Melcor Developments Ltd. (TSE:MRD) is about to trade ex-dividend in the next 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Thus, you can purchase Melcor Developments' shares before the 14th of December in order to receive the dividend, which the company will pay on the 31st of December.
The company's next dividend payment will be CA$0.12 per share, and in the last 12 months, the company paid a total of CA$0.44 per share. Calculating the last year's worth of payments shows that Melcor Developments has a trailing yield of 3.1% on the current share price of CA$14.29. If you buy this business for its dividend, you should have an idea of whether Melcor Developments's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
View our latest analysis for Melcor Developments
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Melcor Developments distributed an unsustainably high 116% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. What's good is that dividends were well covered by free cash flow, with the company paying out 21% of its cash flow last year.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Melcor Developments fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Click here to see how much of its profit Melcor Developments paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Melcor Developments's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 31% a year over the past five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Melcor Developments has delivered an average of 1.0% per year annual increase in its dividend, based on the past 10 years of dividend payments.
Final Takeaway
Should investors buy Melcor Developments for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 116% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Melcor Developments's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Bottom line: Melcor Developments has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
With that being said, if you're still considering Melcor Developments as an investment, you'll find it beneficial to know what risks this stock is facing. For instance, we've identified 4 warning signs for Melcor Developments (2 don't sit too well with us) you should be aware of.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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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.
