Yahoo Finance Do These 3 Checks Before Buying MSC Industrial Direct Co., Inc. (NYSE:MSM) For Its Upcoming Dividend
It looks like MSC Industrial Direct Co., Inc. (NYSE:MSM) is about to go ex-dividend in the next 3 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase MSC Industrial Direct's shares on or after the 8th of April will not receive the dividend, which will be paid on the 23rd of April.
The company's next dividend payment will be US$0.83 per share, on the back of last year when the company paid a total of US$3.32 to shareholders. Based on the last year's worth of payments, MSC Industrial Direct stock has a trailing yield of around 3.5% on the current share price of US$95.11. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether MSC Industrial Direct can afford its dividend, and if the dividend could grow.
View our latest analysis for MSC Industrial Direct
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. MSC Industrial Direct paid out 59% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Dividends consumed 53% 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 MSC Industrial Direct'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?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's not encouraging to see that MSC Industrial Direct's earnings are effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, MSC Industrial Direct has lifted its dividend by approximately 11% a year on average.
To Sum It Up
Should investors buy MSC Industrial Direct for the upcoming dividend? MSC Industrial Direct has been unable to generate earnings growth, but at least its dividend looks sustainable, with its profit and cashflow payout ratios within reasonable limits. Bottom line: MSC Industrial Direct has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Although, if you're still interested in MSC Industrial Direct and want to know more, you'll find it very useful to know what risks this stock faces. For example - MSC Industrial Direct has 1 warning sign we think you should be aware of.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
