Today we’ll take a closer look at MLP SE (ETR:MLP) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on your dividends, it’s important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you’ll find our analysis useful.
A high yield and a long history of paying dividends is an appealing combination for MLP. We’d guess that plenty of investors have purchased it for the income. Some simple analysis can reduce the risk of holding MLP for its dividend, and we’ll focus on the most important aspects below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. In the last year, MLP paid out 61% of its profit as dividends. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.
Consider getting our latest analysis on MLP’s financial position here.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. MLP has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was €0.25 in 2010, compared to €0.21 last year. The dividend has shrunk at around 1.7% a year during that period. MLP’s dividend has been cut sharply at least once, so it hasn’t fallen by 1.7% every year, but this is a decent approximation of the long term change.
A shrinking dividend over a ten-year period is not ideal, and we’d be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. MLP has grown its earnings per share at 5.0% per annum over the past five years. Growth of 5.0% is relatively anaemic growth, which we wonder about. If the company is struggling to grow, perhaps that’s why it elects to pay out more than half of its earnings to shareholders.
To summarise, shareholders should always check that MLP’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. MLP’s payout ratio is within an average range for most market participants. Second, earnings growth has been ordinary, and its history of dividend payments is chequered – having cut its dividend at least once in the past. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than MLP out there.
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 2 warning signs for MLP that investors should know about before committing capital to this stock.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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