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 commonly two business days 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. Thus, you can purchase Magna International’s shares before the 16th of May in order to receive the dividend, which the company will pay on the 30th of May.
The company’s next dividend payment will be US$0.485 per share. Last year, in total, the company distributed US$1.94 to shareholders. Calculating the last year’s worth of payments shows that Magna International has a trailing yield of 5.6% on the current share price of CA$48.51. If you buy this business for its dividend, you should have an idea of whether Magna International’s dividend is reliable and sustainable. As a result, readers should always check whether Magna International has been able to grow its dividends, or if the dividend might be cut.
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. That’s why it’s good to see Magna International paying out a modest 48% of its earnings. A useful secondary check can be to evaluate whether Magna International generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 36% of the free cash flow it generated, which is a comfortable payout ratio.
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.
See our latest analysis for Magna International
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we’re discomforted by Magna International’s 6.2% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Magna International has delivered an average of 9.8% per year annual increase in its dividend, based on the past 10 years of dividend payments.
Has Magna International got what it takes to maintain its dividend payments? Magna International has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. In summary, while it has some positive characteristics, we’re not inclined to race out and buy Magna International today.
Wondering what the future holds for Magna International? See what the 16 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you’re in the market for strong dividend payers, we recommend checking our selection of top 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.