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It looks like NVE Corporation (NASDAQ:NVEC) is about to go ex-dividend in the next three days. This means that investors who purchase shares on or after the 30th of October will not receive the dividend, which will be paid on the 30th of November.
NVE's next dividend payment will be US$1.00 per share, on the back of last year when the company paid a total of US$4.00 to shareholders. Based on the last year's worth of payments, NVE stock has a trailing yield of around 8.4% on the current share price of $47.9. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether NVE has been able to grow its dividends, or if the dividend might be cut.
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. NVE paid out 165% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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. NVE paid out more free cash flow than it generated - 138%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
NVE does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
Cash is slightly more important than profit from a dividend perspective, but given NVE's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. So we're not too excited that NVE's earnings are down 3.9% a year over the past five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. NVE's dividend payments are effectively flat on where they were five years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.
The Bottom Line
Is NVE an attractive dividend stock, or better left on the shelf? Not only are earnings per share declining, but NVE is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
With that in mind though, if the poor dividend characteristics of NVE don't faze you, it's worth being mindful of the risks involved with this business. In terms of investment risks, we've identified 2 warning signs with NVE and understanding them should be part of your investment process.
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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