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Why It Might Not Make Sense To Buy Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC) For Its Upcoming Dividend

Simply Wall St

It looks like Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC) is about to go ex-dividend in the next 3 days. Investors can purchase shares before the 26th of September in order to be eligible for this dividend, which will be paid on the 14th of October.

Kulicke and Soffa Industries's upcoming dividend is US$0.1 a share, following on from the last 12 months, when the company distributed a total of US$0.5 per share to shareholders. Based on the last year's worth of payments, Kulicke and Soffa Industries stock has a trailing yield of around 2.0% on the current share price of $24.18. 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 investigate whether Kulicke and Soffa Industries can afford its dividend, and if the dividend could grow.

See our latest analysis for Kulicke and Soffa Industries

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Kulicke and Soffa Industries paid out 91% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Kulicke and Soffa Industries generated enough free cash flow to afford its dividend. Fortunately, it paid out only 32% of its free cash flow in the past year.

It's good to see that while Kulicke and Soffa Industries's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

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

NasdaqGS:KLIC Historical Dividend Yield, September 22nd 2019

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 Kulicke and Soffa Industries's 7.8% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Given that Kulicke and Soffa Industries has only been paying a dividend for a year, there's not much of a past history to draw insight from.

The Bottom Line

Is Kulicke and Soffa Industries an attractive dividend stock, or better left on the shelf? It's not a great combination to see a company with earnings in decline and paying out 91% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Kulicke and Soffa Industries's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Ever wonder what the future holds for Kulicke and Soffa Industries? See what the four analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

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.

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.