Metcash Limited (ASX:MTS) will pay a dividend of A$0.11 on the 30th of January. The yield is still above the industry average at 6.3%.

See our latest analysis for Metcash

Metcash's Dividend Is Well Covered By Earnings

If the payments aren't sustainable, a high yield for a few years won't matter that much. The last payment made up 78% of earnings, but cash flows were much higher. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.

Over the next year, EPS is forecast to expand by 8.4%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 75% which would be quite comfortable going to take the dividend forward. 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 A$0.28 in 2013, and the most recent fiscal year payment was A$0.225. The dividend has shrunk at around 2.2% a year during that period. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

Metcash's Dividend Might Lack Growth

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see that Metcash has been growing its earnings per share at 37% a year over the past five years. Earnings per share is growing nicely, but the company is paying out most of its earnings as dividends. This might be sustainable, but we wonder why Metcash is not retaining those earnings to reinvest in growth.

In Summary

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. 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. This company is not in the top tier of income providing stocks.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. 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 1 warning sign for Metcash that investors should know about before committing capital to this stock. Is Metcash not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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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.