U.S. Markets closed

RF Industries, Ltd.'s (NASDAQ:RFIL) Could Be A Buy For Its Upcoming Dividend

Simply Wall St

RF Industries, Ltd. (NASDAQ:RFIL) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 30th of March will not receive this dividend, which will be paid on the 15th of April.

RF Industries's upcoming dividend is US$0.02 a share, following on from the last 12 months, when the company distributed a total of US$0.08 per share to shareholders. Based on the last year's worth of payments, RF Industries has a trailing yield of 1.9% on the current stock price of $4.12. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether RF Industries has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for RF Industries

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. That's why it's good to see RF Industries paying out a modest 26% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. The good news is it paid out just 16% of its free cash flow in the last year.

It's positive to see that RF Industries'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.

Click here to see how much of its profit RF Industries paid out over the last 12 months.

NasdaqGM:RFIL Historical Dividend Yield March 26th 2020

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 earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, RF Industries's earnings per share have been growing at 14% a year for the past five years. The company has managed to grow earnings at a rapid rate, while reinvesting most of the profits within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. RF Industries has delivered 2.9% dividend growth per year on average over the past ten years. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

Final Takeaway

Should investors buy RF Industries for the upcoming dividend? RF Industries has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past ten years, but the conservative payout ratio makes the current dividend look sustainable. RF Industries looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

So while RF Industries looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Our analysis shows 5 warning signs for RF Industries and you should be aware of these before buying any shares.

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.

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.