Magna International Inc. (TSE:MG) is about to trade ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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. Meaning, you will need to purchase Magna International’s shares before the 16th of August to receive the dividend, which will be paid on the 30th of August.
The company’s next dividend payment will be US$0.475 per share. Last year, in total, the company distributed US$1.90 to shareholders. Calculating the last year’s worth of payments shows that Magna International has a trailing yield of 4.9% on the current share price of CA$53.28. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! So we need to investigate whether Magna International can afford its dividend, and if the dividend could grow.
Check out our latest analysis for Magna International
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Magna International is paying out an acceptable 55% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Magna International generated enough free cash flow to afford its dividend. Dividends consumed 64% of the company’s free cash flow last year, which is within a normal range for most dividend-paying organisations.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we’re concerned to see Magna International’s earnings per share have dropped 12% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Magna International has lifted its dividend by approximately 11% a year on average. That’s interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company’s profits. This can be valuable for shareholders, but it can’t go on forever.
Final Takeaway
Should investors buy Magna International for the upcoming dividend? While earnings per share are shrinking, it’s encouraging to see that at least Magna International’s dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. Overall it doesn’t look like the most suitable dividend stock for a long-term buy and hold investor.
With that in mind though, if the poor dividend characteristics of Magna International don’t faze you, it’s worth being mindful of the risks involved with this business. Our analysis shows 1 warning sign for Magna International and you should be aware of it before buying any shares.
Generally, we wouldn’t recommend just buying the first dividend stock you see. Here’s a curated list of interesting stocks that are strong dividend payers.
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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.