Magellan Aerospace Corporation (TSE:MAL) is reducing its dividend from last year's comparable payment to CA$0.025 on the 30th of December. This means that the annual payment will be 1.4% of the current stock price, which is in line with the average for the industry.
View our latest analysis for Magellan Aerospace
Magellan Aerospace's Dividend Is Well Covered By Earnings
Solid dividend yields are great, but they only really help us if the payment is sustainable. Even though Magellan Aerospace isn't generating a profit, it is generating healthy free cash flows that easily cover the dividend. This gives us some comfort about the level of the dividend payments.
Analysts expect a massive rise in earnings per share in the next year. Assuming the dividend continues along recent trends, we think the payout ratio will be 34%, which makes us pretty comfortable with the sustainability of the dividend.
Magellan Aerospace's Dividend Has Lacked Consistency
Even in its relatively short history, the company has reduced the dividend at least once. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. The annual payment during the last 9 years was CA$0.12 in 2013, and the most recent fiscal year payment was CA$0.10. The dividend has shrunk at around 2.0% a year during that period. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.
Dividend Growth Potential Is Shaky
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. Magellan Aerospace's EPS has fallen by approximately 53% per year during the past five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.
Magellan Aerospace's Dividend Doesn't Look Sustainable
In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. 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. However, there are other things to consider for investors when analysing stock performance. Now, if you want to look closer, it would be worth checking out our free research on Magellan Aerospace management tenure, salary, and performance. Is Magellan Aerospace not quite the opportunity you were looking for? Why not check out 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.
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