The board of Master Drilling Group Limited (JSE:MDI) has announced that it will be paying its dividend of $0.525 on the 20th of May, an increased payment from last year’s comparable dividend. Based on this payment, the dividend yield for the company will be 4.3%, which is fairly typical for the industry.
Check out our latest analysis for Master Drilling Group
Master Drilling Group Doesn’t Earn Enough To Cover Its Payments
While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Prior to this announcement, Master Drilling Group’s dividend was only 21% of earnings, however it was paying out 313% of free cash flows. A cash payout ratio this high could put the dividend under pressure and force the company to reduce it in the future if it were to run into tough times.
Over the next year, EPS could expand by 4.1% if the company continues along the path it has been on recently. If the dividend continues on its recent course, the payout ratio in 12 months could be 386%, which is a bit high and could start applying pressure to the balance sheet.
Master Drilling Group’s Dividend Has Lacked Consistency
Looking back, Master Drilling Group’s dividend hasn’t been particularly consistent. This suggests that the dividend might not be the most reliable. Since 2017, the annual payment back then was $0.0237, compared to the most recent full-year payment of $0.0273. This works out to be a compound annual growth rate (CAGR) of approximately 2.0% a year over that time. We’re glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.
Dividend Growth May Be Hard To Achieve
With a relatively unstable dividend, it’s even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Earnings has been rising at 4.1% per annum over the last five years, which admittedly is a bit slow. Earnings growth is slow, but on the plus side, the dividend payout ratio is low and dividends could grow faster than earnings, if the company decides to increase its payout ratio.
In Summary
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While Master Drilling Group is earning enough to cover the payments, the cash flows are lacking. Overall, we don’t think this company has the makings of a good income stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For example, we’ve picked out 2 warning signs for Master Drilling Group that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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