MSC Industrial Direct Co., Inc. (NYSE: MSM) announced that it will pay a dividend of $0.75 per share on July 26. The dividend yield will be 4.1% based on this payout, which is still above the industry average.

Check out our latest analysis for MSC Industrial Direct

MSC Industrial Direct payment provides strong revenue coverage

Impressive dividend yields are good, but that doesn’t matter much if payouts can’t be sustained. Based on the latest dividend, MSC Industrial Direct earns enough to cover the payout, but it’s 105% of cash flow. The company might be more focused on returning cash to shareholders, but paying out such a portion of its cash flow could expose the dividend to a reduction in the future.

Looking ahead, earnings per share are expected to grow 15.2% over the next year. If the dividend continues to follow recent trends, we estimate the payout ratio to be 54%, which is within the range that allows us to be comfortable with the sustainability of the dividend.

MSC Industrial Direct has a strong track record

The company has a steady history of paying dividends with very little fluctuation. The dividend has increased from US$1.00 in 2012 to the last annual payment of US$3.00. This equates to a compound annual growth rate (CAGR) of approximately 12% per year during this period. It is good to see that there has been strong growth in dividends and that there has not been a reduction for a long time.

MSC Industrial Direct could increase its dividend

Investors might be drawn to the stock because of the quality of its payment history. MSC Industrial Direct has seen EPS grow over the past five years, at 5.9% annually. The lack of cash flow makes us somewhat cautious, however, especially regarding the future of the dividend.

Our thoughts on the MSC Industrial Direct dividend

In summary, while it’s good to see the dividend hasn’t been cut, we’re a little cautious about MSC Industrial Direct’s payouts as there may be issues maintaining them in the future. Although the low payout ratio is a redeeming feature, this is offset by the minimum cash to cover payouts. We would probably look elsewhere for an income investment.

Investors generally tend to favor companies with a consistent and stable dividend policy as opposed to those with an irregular one. However, there are other things for investors to consider when analyzing stock performance. For example, we identified 2 warning signs for MSC Industrial Direct which you should be aware of before investing. Isn’t MSC Industrial Direct just the opportunity you’ve been looking for? Why not check out our selection of the best dividend stocks.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.