The board of Medibank Private Limited (ASX:MPL) has announced that it will pay a dividend on the 20th of March, with investors receiving A$0.072 per share. This makes the dividend yield 4.0%, which is above the industry average.

Check out our latest analysis for Medibank Private

Medibank Private's Dividend Is Well Covered By Earnings

A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, Medibank Private's dividend was only 62% of earnings, however it was paying out 127% of free cash flows. This signals that the company is more focused on returning cash flow to shareholders, but it could mean that the dividend is exposed to cuts in the future.

Over the next year, EPS is forecast to fall by 11.3%. However, if the dividend continues along recent trends, we estimate the payout ratio could reach 76%, meaning that most of the company's earnings are being paid out to shareholders. historic-dividend

Medibank Private Doesn't Have A Long Payment History

It is great to see that Medibank Private has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. Since 2015, the annual payment back then was A$0.053, compared to the most recent full-year payment of A$0.146. This means that it has been growing its distributions at 12% per annum over that time. It is always nice to see strong dividend growth, but with such a short payment history we wouldn't be inclined to rely on it until a longer track record can be developed.

The Dividend Looks Likely To Grow

Investors could be attracted to the stock based on the quality of its payment history. We are encouraged to see that Medibank Private has grown earnings per share at 13% per year over the past five years. The company is paying out a lot of its cash as a dividend, but it looks okay based on the payout ratio.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Medibank Private's payments are rock solid. While Medibank Private is earning enough to cover the payments, the cash flows are lacking. We don't think Medibank Private is a great stock to add to your portfolio if income is your focus.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Medibank Private has 2 warning signs (and 1 which can't be ignored) we think you should know about. Is Medibank Private not quite the opportunity you were looking for? Why not check out 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.