Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Magna International Inc. (TSE:MG) is about to go ex-dividend in just four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company’s books to be eligible for a dividend payment. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, Magna International investors that purchase the stock on or after the 17th of November will not receive the dividend, which will be paid on the 2nd of December.
The company’s next dividend payment will be US$0.45 per share, and in the last 12 months, the company paid a total of US$1.80 per share. Looking at the last 12 months of distributions, Magna International has a trailing yield of approximately 2.9% on its current stock price of CA$83.23. If you buy this business for its dividend, you should have an idea of whether Magna International’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 Magna International
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Magna International paid out more than half (55%) of its earnings last year, which is a regular payout ratio for most companies. 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. Over the last year it paid out 73% of its free cash flow as dividends, within the usual range for most companies.
It’s positive to see that Magna International’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we’re concerned to see Magna International’s earnings per share have dropped 8.3% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Magna International has delivered an average of 13% per year annual increase in its dividend, based on the past 10 years of dividend payments. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it’s always worth checking for when the company can’t increase the payout ratio any more – because then the music stops.
To Sum It Up
Should investors buy Magna International for the upcoming dividend? It’s never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We’re aware though that if earnings continue to decline, the dividend could be at risk. Bottom line: Magna International has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Having said that, if you’re looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Magna International. Case in point: We’ve spotted 3 warning signs for Magna International you should be aware of.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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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