Yahoo Finance Is Merlin Entertainments plc (LON:MERL) An Attractive Dividend Stock?
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Today we'll take a closer look at Merlin Entertainments plc (LON:MERL) 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. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
Investors might not know much about Merlin Entertainments's dividend prospects, even though it has been paying dividends for the last five years and offers a 2.2% yield. While the yield may not look too great, the relatively long payment history is interesting. Some simple analysis can reduce the risk of holding Merlin Entertainments for its dividend, and we'll focus on the most important aspects below.
Explore this interactive chart for our latest analysis on Merlin Entertainments!
Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. 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. Merlin Entertainments paid out 36% of its profit as dividends, over the trailing twelve month period. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Plus, there is room to increase the payout ratio over time.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Merlin Entertainments paid out 64% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. It's positive to see that Merlin Entertainments's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Is Merlin Entertainments's Balance Sheet Risky?
As Merlin Entertainments has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick way to check a company's financial situation uses these two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA is a measure of a company's total debt. Net interest cover measures the ability to meet interest payments on debt. Essentially we check that a) a company does not have too much debt, and b) that it can afford to pay the interest. With net debt of 2.41 times its EBITDA, Merlin Entertainments's debt burden is within a normal range for most listed companies.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company's net interest expense. Net interest cover of 6.96 times its interest expense appears reasonable for Merlin Entertainments, although we're conscious that even high interest cover doesn't make a company bulletproof.
Remember, you can always get a snapshot of Merlin Entertainments's latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Merlin Entertainments has been paying a dividend for the past five years. During the past five-year period, the first annual payment was UK£0.04 in 2014, compared to UK£0.08 last year. Dividends per share have grown at approximately 15% per year over this time.
The dividend has been growing pretty quickly, which could be enough to get us interested even though the dividend history is relatively short. Further research may be warranted.
Dividend Growth Potential
Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Merlin Entertainments has grown its earnings per share at 8.3% per annum over the past five years. Earnings per share have been growing at a credible rate. What's more, the payout ratio is reasonable and provides some protection to the dividend, or even the potential to increase it.
Conclusion
To summarise, shareholders should always check that Merlin Entertainments's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Merlin Entertainments's dividend payout ratios are within normal bounds, although we note its cash flow is not as strong as the income statement would suggest. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. Overall we think Merlin Entertainments is an interesting dividend stock, although it could be better.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 10 Merlin Entertainments analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.
