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NVE Corporation (NASDAQ:NVEC) stock is about to trade ex-dividend in 4 days. You can purchase shares before the 29th of January in order to receive the dividend, which the company will pay on the 26th of February.
NVE's next dividend payment will be US$1.00 per share, and in the last 12 months, the company paid a total of US$4.00 per share. Calculating the last year's worth of payments shows that NVE has a trailing yield of 5.7% on the current share price of $70.12. 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 out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. NVE paid out 162% 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 - 163%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
Cash is slightly more important than profit from a dividend perspective, but given NVE's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's not ideal to see NVE's earnings per share have been shrinking at 3.6% a year over the previous five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. It looks like the NVE dividends are largely the same as they were six 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.
To Sum It Up
From a dividend perspective, should investors buy or avoid NVE? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (162%) and cash flow as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. It's not that we think NVE is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Although, if you're still interested in NVE and want to know more, you'll find it very useful to know what risks this stock faces. Our analysis shows 2 warning signs for NVE 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.
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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