Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Bel Fuse Inc. (NASDAQ:BELF.A) is about to trade ex-dividend in the next four days. Ex-dividend means that investors that purchase the stock on or after the 14th of January will not receive this dividend, which will be paid on the 1st of February.
Bel Fuse's next dividend payment will be US$0.06 per share, and in the last 12 months, the company paid a total of US$0.28 per share. Based on the last year's worth of payments, Bel Fuse stock has a trailing yield of around 1.9% on the current share price of $14.72. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Bel Fuse can afford its dividend, and if the dividend could grow.
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. Bel Fuse distributed an unsustainably high 119% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Luckily it paid out just 9.9% of its free cash flow last year.
It's good to see that while Bel Fuse's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
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. Bel Fuse's earnings per share have fallen at approximately 20% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. It looks like the Bel Fuse dividends are largely the same as they were 10 years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.
Is Bel Fuse worth buying for its dividend? It's never great to see earnings per share declining, especially when a company is paying out 119% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Bel Fuse's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Bel Fuse. For instance, we've identified 4 warning signs for Bel Fuse (1 is a bit unpleasant) you should be aware of.
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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