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It looks like Silicon Motion Technology Corporation (NASDAQ:SIMO) is about to go ex-dividend in the next three days. Ex-dividend means that investors that purchase the stock on or after the 5th of May will not receive this dividend, which will be paid on the 20th of May.
Silicon Motion Technology's upcoming dividend is US$0.35 a share, following on from the last 12 months, when the company distributed a total of US$1.40 per share to shareholders. Looking at the last 12 months of distributions, Silicon Motion Technology has a trailing yield of approximately 1.9% on its current stock price of $71.82. 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 investigate whether Silicon Motion Technology can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Silicon Motion Technology paid out more than half (61%) of its earnings last year, which is a regular payout ratio for most companies. 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. Over the last year it paid out 50% of its free cash flow as dividends, within the usual range for most companies.
It's positive to see that Silicon Motion Technology's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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. This is why it's a relief to see Silicon Motion Technology earnings per share are up 5.5% per annum 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.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Silicon Motion Technology has delivered an average of 11% per year annual increase in its dividend, based on the past eight years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
Is Silicon Motion Technology an attractive dividend stock, or better left on the shelf? Earnings per share have been growing modestly and Silicon Motion Technology paid out a bit over half of its earnings and free cash flow last year. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
If you want to look further into Silicon Motion Technology, it's worth knowing the risks this business faces. For example - Silicon Motion Technology has 3 warning signs we think you should be aware of.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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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