It looks like Microchip Technology Incorporated (NASDAQ:MCHP) is about to go ex-dividend in the next four days. This means that investors who purchase shares on or after the 19th of November will not receive the dividend, which will be paid on the 4th of December.
Microchip Technology's next dividend payment will be US$0.37 per share, and in the last 12 months, the company paid a total of US$1.47 per share. Calculating the last year's worth of payments shows that Microchip Technology has a trailing yield of 1.2% on the current share price of $126.15. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is 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. Microchip Technology paid out 59% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Microchip Technology generated enough free cash flow to afford its dividend. It paid out 21% of its free cash flow as dividends last year, which is conservatively low.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Microchip Technology, with earnings per share up 6.1% on average over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Microchip Technology has delivered an average of 0.8% per year annual increase in its dividend, based on the past 10 years of dividend payments.
Has Microchip Technology got what it takes to maintain its dividend payments? While earnings per share growth has been modest, Microchip Technology's dividend payouts are around an average level; without a sharp change in earnings we feel that the dividend is likely somewhat sustainable. Pleasingly the company paid out a conservatively low percentage of its free cash flow. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Microchip Technology's dividend merits.
In light of that, while Microchip Technology has an appealing dividend, it's worth knowing the risks involved with this stock. For example, Microchip Technology has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.
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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