Marshalls plc (LON:MSLH) has announced that on 1st of December, it will be paying a dividend of£0.026, which a reduction from last year's comparable dividend. The dividend yield of 4.5% is still a nice boost to shareholder returns, despite the cut.

Check out our latest analysis for Marshalls

Marshalls' Dividend Is Well Covered By Earnings

If the payments aren't sustainable, a high yield for a few years won't matter that much. Based on the last payment, Marshalls' profits didn't cover the dividend, but the company was generating enough cash instead. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.

The next year is set to see EPS grow by 148.1%. If the dividend continues along recent trends, we estimate the payout ratio will be 60%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high. historic-dividend

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The annual payment during the last 10 years was £0.0525 in 2013, and the most recent fiscal year payment was £0.125. This works out to be a compound annual growth rate (CAGR) of approximately 9.1% a year over that time. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

Dividend Growth Potential Is Shaky

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Over the past five years, it looks as though Marshalls' EPS has declined at around 17% a year. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.

The Dividend Could Prove To Be Unreliable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 3 warning signs for Marshalls that investors should take into consideration. Is Marshalls not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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