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Why It Might Not Make Sense To Buy BE Semiconductor Industries N.V. (AMS:BESI) For Its Upcoming Dividend

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see BE Semiconductor Industries N.V. (AMS:BESI) is about to trade ex-dividend in the next 1 days. You can purchase shares before the 5th of May in order to receive the dividend, which the company will pay on the 8th of May.

BE Semiconductor Industries's next dividend payment will be €1.01 per share, and in the last 12 months, the company paid a total of €1.01 per share. Calculating the last year's worth of payments shows that BE Semiconductor Industries has a trailing yield of 2.7% on the current share price of €37.56. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether BE Semiconductor Industries can afford its dividend, and if the dividend could grow.

See our latest analysis for BE Semiconductor Industries

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. It paid out 85% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. BE Semiconductor Industries paid out more free cash flow than it generated - 149%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

BE Semiconductor Industries paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to BE Semiconductor Industries's ability to maintain its dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

ENXTAM:BESI Historical Dividend Yield May 2nd 2020

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see BE Semiconductor Industries earnings per share are up 4.6% per annum over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. BE Semiconductor Industries has delivered 29% dividend growth per year on average over the past nine years. 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.

Final Takeaway

Should investors buy BE Semiconductor Industries for the upcoming dividend? Earnings per share have grown somewhat, although BE Semiconductor Industries paid out over half its profits and the dividend was not well covered by free cash flow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

So if you're still interested in BE Semiconductor Industries despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 3 warning signs for BE Semiconductor Industries and you should be aware of them before buying any shares.

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.

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.