Main Street Capital Corporation (NYSE:MAIN) has announced that it will pay a dividend of $0.10 per share on the 28th of December. This means the annual payment is 8.1% of the current stock price, which is above the average for the industry.
Main Street Capital'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. Before making this announcement, Main Street Capital was paying out a fairly large proportion of earnings, and it wasn't generating positive free cash flows either. We think that this practice can make the dividend quite risky in the future.
Over the next year, EPS is forecast to expand by 55.7%. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 65% which brings it into quite a comfortable range.
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2012, the annual payment back then was $1.68, compared to the most recent full-year payment of $2.98. This works out to be a compound annual growth rate (CAGR) of approximately 5.9% 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.
Main Street Capital May Find It Hard To Grow The Dividend
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Unfortunately, Main Street Capital's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year. Main Street Capital's earnings per share has barely grown, which is not ideal - perhaps this is why the company pays out the majority of its earnings to shareholders. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.
An additional note is that the company has been raising capital by issuing stock equal to 11% of shares outstanding in the last 12 months. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.
The Dividend Could Prove To Be Unreliable
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. The payments are bit high to be considered sustainable, and the track record isn't the best. We would be a touch cautious of relying on this stock primarily for the dividend income.
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. Case in point: We've spotted 5 warning signs for Main Street Capital (of which 2 are a bit concerning!) you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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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.
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