December 3, 2021

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Is It Smart To Buy McGrath RentCorp (NASDAQ:MGRC) Before It Goes Ex-Dividend?

It looks like McGrath RentCorp (NASDAQ:MGRC) is about to go ex-dividend in the next 4 days. Investors can purchase shares before the 14th of April in order to be eligible for this dividend, which will be paid on the 30th of April.

McGrath RentCorp’s next dividend payment will be US$0.42 per share, on the back of last year when the company paid a total of US$1.50 to shareholders. Based on the last year’s worth of payments, McGrath RentCorp stock has a trailing yield of around 3.1% on the current share price of $53.39. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for McGrath RentCorp

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. McGrath RentCorp paid out a comfortable 38% of its profit last year. A useful secondary check can be to evaluate whether McGrath RentCorp generated enough free cash flow to afford its dividend. It paid out more than half (67%) of its free cash flow in the past year, which is within an average range for most companies.

It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

NasdaqGS:MGRC Historical Dividend Yield April 9th 2020

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we’re glad to see McGrath RentCorp’s earnings per share have risen 18% per annum over the last five years. McGrath RentCorp has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.

Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, McGrath RentCorp has increased its dividend at approximately 6.7% a year on average. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

From a dividend perspective, should investors buy or avoid McGrath RentCorp? Earnings per share have grown at a nice rate in recent times and over the last year, McGrath RentCorp paid out less than half its earnings and a bit over half its free cash flow. Overall we think this is an attractive combination and worthy of further research.

On that note, you’ll want to research what risks McGrath RentCorp is facing. Our analysis shows 2 warning signs for McGrath RentCorp and you should be aware of these before buying any shares.

If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at [email protected] 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.

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