Ubiquiti Inc. (NYSE:UI) is about to trade ex-dividend in the next three days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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. Therefore, if you purchase Ubiquiti's shares on or after the 13th of May, you won't be eligible to receive the dividend, when it is paid on the 23rd of May.
The company's next dividend payment will be US$0.60 per share, on the back of last year when the company paid a total of US$2.40 to shareholders. Calculating the last year's worth of payments shows that Ubiquiti has a trailing yield of 1.0% on the current share price of $232.79. If you buy this business for its dividend, you should have an idea of whether Ubiquiti's dividend is reliable and sustainable. So we need to investigate whether Ubiquiti can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Ubiquiti's payout ratio is modest, at just 31% of profit. A useful secondary check can be to evaluate whether Ubiquiti generated enough free cash flow to afford its dividend. Fortunately, it paid out only 30% of its free cash flow in the past year.
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?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see Ubiquiti's earnings have been skyrocketing, up 24% per annum for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Ubiquiti has delivered 39% dividend growth per year on average over the past eight years. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
The Bottom Line
Is Ubiquiti an attractive dividend stock, or better left on the shelf? It's great that Ubiquiti is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. Overall we think this is an attractive combination and worthy of further research.
In light of that, while Ubiquiti has an appealing dividend, it's worth knowing the risks involved with this stock. Be aware that Ubiquiti is showing 3 warning signs in our investment analysis, and 1 of those is concerning...
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.