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Public Joint Stock Company Moscow City Telephone Network (MCX:MGTS) Investors Should Think About This Before Buying It For Its Dividend

Dividend paying stocks like Public Joint Stock Company Moscow City Telephone Network (MCX:MGTS) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

In this case, Moscow City Telephone Network likely looks attractive to dividend investors, given its 9.5% dividend yield and nine-year payment history. We'd agree the yield does look enticing. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Click the interactive chart for our full dividend analysis

MISX:MGTS Historical Dividend Yield March 30th 2020
MISX:MGTS Historical Dividend Yield March 30th 2020

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 152% of Moscow City Telephone Network's profits were paid out as dividends in the last 12 months. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Moscow City Telephone Network paid out 216% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. Cash is slightly more important than profit from a dividend perspective, but given Moscow City Telephone Network's payouts were not well covered by either earnings or cash flow, we would definitely be concerned about the sustainability of this dividend.

With a strong net cash balance, Moscow City Telephone Network investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of Moscow City Telephone Network's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Looking at the last decade of data, we can see that Moscow City Telephone Network paid its first dividend at least nine years ago. It's good to see that Moscow City Telephone Network has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was ₽198 in 2011, compared to ₽232 last year. This works out to be a compound annual growth rate (CAGR) of approximately 1.8% a year over that time. The dividends haven't grown at precisely 1.8% every year, but this is a useful way to average out the historical rate of growth.

We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don't think this is an attractive combination.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Earnings have grown at around 2.3% a year for the past five years, which is better than seeing them shrink! Still, the company has struggled to grow its EPS, and currently pays out 152% of its earnings. As they say in finance, 'past performance is not indicative of future performance', but we are not confident a company with limited earnings growth and a high payout ratio will be a star dividend-payer over the next decade.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Moscow City Telephone Network paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Second, earnings growth has been ordinary, and its history of dividend payments is chequered - having cut its dividend at least once in the past. In this analysis, Moscow City Telephone Network doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come accross 4 warning signs for Moscow City Telephone Network you should be aware of, and 1 of them is a bit concerning.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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.

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. Thank you for reading.