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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 CMC Materials, Inc. (NASDAQ:CCMP) is about to go ex-dividend in just four days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase CMC Materials' shares on or after the 22nd of June will not receive the dividend, which will be paid on the 30th of July.
The company's upcoming dividend is US$0.46 a share, following on from the last 12 months, when the company distributed a total of US$1.84 per share to shareholders. Looking at the last 12 months of distributions, CMC Materials has a trailing yield of approximately 1.2% on its current stock price of $153.62. 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.
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. CMC Materials paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out 25% of its free cash flow as dividends last year, which is conservatively low.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. CMC Materials was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. CMC Materials has delivered an average of 21% per year annual increase in its dividend, based on the past five years of dividend payments.
Is CMC Materials worth buying for its dividend? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of CMC Materials.
With that being said, if you're still considering CMC Materials as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 2 warning signs for CMC Materials that we strongly recommend you have a look at before investing in the company.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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