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Don't Race Out To Buy Mesabi Trust (NYSE:MSB) Just Because It's Going Ex-Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Mesabi Trust (NYSE:MSB) is about to go ex-dividend in just four days. If you purchase the stock on or after the 29th of October, you won't be eligible to receive this dividend, when it is paid on the 20th of November.

The upcoming dividend for Mesabi Trust will put a total of US$0.36 per share in shareholders' pockets, up from last year's total dividends of US$0.20. If you buy this business for its dividend, you should have an idea of whether Mesabi Trust's dividend is reliable and sustainable. So we need to investigate whether Mesabi Trust can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Mesabi Trust

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Mesabi Trust distributed an unsustainably high 147% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Mesabi Trust generated enough free cash flow to afford its dividend. Mesabi Trust paid out more free cash flow than it generated - 126%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Cash is slightly more important than profit from a dividend perspective, but given Mesabi Trust's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see how much of its profit Mesabi Trust paid out over the last 12 months.

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Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. So we're not too excited that Mesabi Trust's earnings are down 4.6% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Mesabi Trust has seen its dividend decline 21% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

Is Mesabi Trust worth buying for its dividend? Not only are earnings per share declining, but Mesabi Trust is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Mesabi Trust. To help with this, we've discovered 1 warning sign for Mesabi Trust that you should be aware of before investing in their shares.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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. 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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