Today we'll take a closer look at MACA Limited (ASX:MLD) 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.
With a nine-year payment history and a 3.8% yield, many investors probably find MACA intriguing. We'd agree the yield does look enticing. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.
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Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. MACA paid out 59% of its profit as dividends, over the trailing twelve month period. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Last year, MACA paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.
While the above analysis focuses on dividends relative to a company's earnings, we do note MACA's strong net cash position, which will let it pay larger dividends for a time, should it choose.
We update our data on MACA every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Volatility
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. The first recorded dividend for MACA, in the last decade, was nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once by more than 20%, and we're cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was AU$0.06 in 2010, compared to AU$0.045 last year. This works out to be a decline of approximately 3.1% per year over that time. MACA's dividend hasn't shrunk linearly at 3.1% per annum, but the CAGR is a useful estimate of the historical rate of change.