Marshalls plc (LON:MSLH) is reducing its dividend to £0.022 on the 1st of Decemberwhich is 15% less than last year’s comparable payment of £0.026. This means that the annual payment will be 4.7% of the current stock price, which is in line with the average for the industry.
While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Marshalls’ stock price has reduced by 39% in the last 3 months, which is not ideal for investors and can explain a sharp increase in the dividend yield.
We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Prior to this announcement, Marshalls’ dividend made up quite a large proportion of earnings but only 65% of free cash flows. This leaves plenty of cash for reinvestment into the business.
Looking forward, earnings per share is forecast to rise by 85.4% over the next year. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 45% which would be quite comfortable going to take the dividend forward.
View our latest analysis for Marshalls
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The annual payment during the last 10 years was £0.06 in 2015, and the most recent fiscal year payment was £0.076. This works out to be a compound annual growth rate (CAGR) of approximately 2.4% a year over that time. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company’s earnings are not consistent.
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Marshalls has seen EPS rising for the last five years, at 6.3% per annum. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we’d generally expect the higher payout ratio to limit its future growth prospects.
In summary, dividends being cut isn’t ideal, however it can bring the payment into a more sustainable range. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. Overall, we don’t think this company has the makings of a good income stock.
It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we’ve picked out 1 warning sign for Marshalls that investors should take into consideration. Is Marshalls not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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