It Might Not Be A Great Idea To Buy Communications Systems, Inc. (NASDAQ:JCS) For Its Next Dividend
Communications Systems, Inc. (NASDAQ:JCS) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 13th of September in order to be eligible for this dividend, which will be paid on the 1st of October.
Communications Systems's next dividend payment will be US$0.02 per share, and in the last 12 months, the company paid a total of US$0.08 per share. Based on the last year's worth of payments, Communications Systems stock has a trailing yield of around 1.6% on the current share price of $4.9. If you buy this business for its dividend, you should have an idea of whether Communications Systems's dividend is reliable and sustainable. So we need to investigate whether Communications Systems can afford its dividend, and if the dividend could grow.
See our latest analysis for Communications Systems
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Communications Systems distributed an unsustainably high 127% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Communications Systems generated enough free cash flow to afford its dividend.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Communications Systems fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Click here to see how much of its profit Communications Systems paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Communications Systems's 17% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Communications Systems has seen its dividend decline 16% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
To Sum It Up
Is Communications Systems worth buying for its dividend? Not only are earnings per share declining, but Communications Systems is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Communications Systems.
Curious about whether Communications Systems has been able to consistently generate growth? Here's a chart of its historical revenue and earnings growth.
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.
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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. Thank you for reading.
