Readers hoping to buy Analog Devices, Inc. (NASDAQ:ADI) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 27th of August, you won't be eligible to receive this dividend, when it is paid on the 9th of September.
Analog Devices's next dividend payment will be US$0.62 per share. Last year, in total, the company distributed US$2.48 to shareholders. Looking at the last 12 months of distributions, Analog Devices has a trailing yield of approximately 2.1% on its current stock price of $116.02. 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 check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Its dividend payout ratio is 80% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be worried about the risk of a drop in 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. It distributed 47% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that Analog Devices'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 Analog Devices earnings per share are up 8.5% 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.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Analog Devices has lifted its dividend by approximately 12% a year on average. 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.
Is Analog Devices an attractive dividend stock, or better left on the shelf? Earnings per share growth has been modest and Analog Devices paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Our analysis shows 2 warning signs for Analog Devices and you should be aware of them before buying any shares.
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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