Analog Devices, Inc. (NASDAQ:ADI) stock is about to trade ex-dividend in 4 days time. Ex-dividend means that investors that purchase the stock on or after the 27th of February will not receive this dividend, which will be paid on the 10th of March.
Analog Devices's next dividend payment will be US$0.62 per share, and in the last 12 months, the company paid a total of US$2.48 per share. Based on the last year's worth of payments, Analog Devices has a trailing yield of 2.0% on the current stock price of $122.76. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Analog Devices is paying out an acceptable 68% of its profit, a common payout level among most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 40% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that Analog Devices's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Analog Devices's earnings per share have been growing at 10% a year for the past five years. Analog Devices is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. 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.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, ten years ago, Analog Devices has lifted its dividend by approximately 12% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
From a dividend perspective, should investors buy or avoid Analog Devices? Analog Devices's growing earnings per share and conservative payout ratios make for a decent combination. We also like that it paid out a lower percentage of its cash flow. Overall we think this is an attractive combination and worthy of further research.
Ever wonder what the future holds for Analog Devices? See what the 24 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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