McMillan Shakespeare's (ASX:MMS) Dividend Will Be Increased To A$0.78

( ) dividend will be increasing from last year's payment of the same period to A$0.78 on 27th of September. This will take the annual payment to 9.

8% of the stock price, which is above what most companies in the industry pay. Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before this announcement, McMillan Shakespeare was paying out 119% of what it was earning, and not generating any free cash flows either.



Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high. Over the next year, EPS is forecast to expand by 21.2%.

If the dividend continues on its recent course, the payout ratio in 12 months could be 108%, which is a bit high and could start applying pressure to the balance sheet. Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2014, the annual payment back then was A$0.

42, compared to the most recent full-year payment of A$1.56. This means that it has been growing its distributions at 14% per annum over that time.

It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious. Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. McMillan Shakespeare has impressed us by growing EPS at 11% per year over the past five years.

However, the company isn't reinvesting a lot back into the business, so we would expect the growth rate to slow down somewhat in the future. Overall, we always like to see the dividend being raised, but we don't think McMillan Shakespeare will make a great income stock. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily.

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. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company.

For example, we've picked out that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our.