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Key Things To Watch Out For If You Are After Quanex Building Products Corporation's (NYSE:NX) 1.8% Dividend

Simply Wall St

Is Quanex Building Products Corporation (NYSE:NX) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

A slim 1.8% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Quanex Building Products could have potential. The company also bought back stock during the year, equivalent to approximately 1.1% of the company's market capitalisation at the time. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Click the interactive chart for our full dividend analysis

NYSE:NX Historical Dividend Yield, January 20th 2020

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Although it reported a loss over the past 12 months, Quanex Building Products currently pays a dividend. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Quanex Building Products's cash payout ratio last year was 15%, which is quite low and suggests that the dividend was thoroughly covered by cash flow.

Is Quanex Building Products's Balance Sheet Risky?

Given Quanex Building Products is paying a dividend but reported a loss over the past year, we need to check its balance sheet for signs of financial distress. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). With net debt of 1.10 times its EBITDA, Quanex Building Products has an acceptable level of debt.

We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company's net interest expense. Net interest cover of 5.46 times its interest expense appears reasonable for Quanex Building Products, although we're conscious that even high interest cover doesn't make a company bulletproof.

Remember, you can always get a snapshot of Quanex Building Products's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Quanex Building Products has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past ten-year period, the first annual payment was US$0.12 in 2010, compared to US$0.32 last year. Dividends per share have grown at approximately 10% per year over this time.

Dividends have been growing pretty quickly, and even more impressively, they haven't experienced any notable falls during this period.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Quanex Building Products's EPS have fallen by approximately 16% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Quanex Building Products's earnings per share, which support the dividend, have been anything but stable.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're not keen on the fact that Quanex Building Products paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. Moreover, earnings have been shrinking. While the dividends have been fairly steady, we'd wonder for how much longer this will be sustainable if earnings continue to decline. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Quanex Building Products out there.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Quanex Building Products stock.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.