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It might not be a good idea to buy Morgan Advanced Materials plc (LON:MGAM) for its next dividend

Vaseline 4 weeks ago

Morgan Advanced Materials plc (LON:MGAM) is about to trade ex-dividend in the next three days. The ex-dividend date is generally set one business day before the record date. This is the cut-off date on which you, as a shareholder, must be present on the company’s books in order to receive the dividend. The ex-dividend date is important because any trade on a stock must be settled before the record date to qualify for dividends. Therefore, if you purchase Morgan Advanced Materials stock on or after April 25th, you will not be eligible for the dividend, when it is paid on May 17th.

The company’s next dividend payment will be UK£0.067 per share, and in the last twelve months the company has paid a total of UK£0.12 per share. Based on the last year’s worth of payments, Morgan Advanced Materials stock has a rolling yield of around 4.2% on the current share price of £2,875. Dividends make an important contribution to investment returns for long-term owners, but only if the dividend continues to be paid. We need to see if the dividend is covered by profits and if it grows.

See our latest analysis for Morgan Advanced Materials

Dividends are typically paid out of company profits, so if a company pays out more than it earned then its dividend is usually at higher risk of being cut. Morgan Advanced Materials pays out an acceptable 73% of its profits, a common payout level for most companies. That said, even highly profitable companies sometimes don’t generate enough cash to pay the dividend. That’s why we should always check whether the dividend is covered by cash flow. Morgan Advanced Materials paid out more free cash flow than it generated last year (189% to be precise), which we think is worryingly high. We’re curious why the company paid out more cash than last year, as this could be one of the first signs that a dividend may be unsustainable.

While Morgan Advanced Materials’s dividends were covered by the company’s reported profits, cash is slightly more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividend. If this were to happen repeatedly, it would pose a risk to Morgan Advanced Materials’ ability to maintain its dividend.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

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Have profits and dividends grown?

Companies with declining profits are riskier for dividend shareholders. If profits fall far enough, the company could be forced to cut its dividend. That’s why it’s not ideal to see that Morgan Advanced Materials’ earnings per share have shrunk by 3.9% per year over the past five years.

Many investors will judge a company’s dividend performance by evaluating how much the dividend payments have changed over time. Morgan Advanced Materials has averaged 1.6% annual dividend growth over the past ten years.

Summing it up

Does Morgan Advanced Materials have what it takes to maintain its dividend payments? It’s definitely not great to see earnings per share shrinking. The company paid an acceptable percentage of its revenues last year, but an uncomfortably high percentage of its cash flow. From a dividend perspective, it is not an attractive combination and we are inclined to pass it up for the time being.

Although, if you are still interested in Morgan Advanced Materials and want to learn more, it will be very useful to know what risks this stock poses. For example, we found Four warning signs for Morgan Advanced Materials which we recommend you consider before investing in the company.

A common investment mistake is buying the first interesting stock you see. Here you will find a complete list of high yield dividend stocks.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.