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We Wouldn't Be Too Quick To Buy NVE Corporation (NASDAQ:NVEC) Before It Goes Ex-Dividend

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NVE Corporation (NASDAQ:NVEC) is about to trade ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. This means that investors who purchase NVE's shares on or after the 30th of July will not receive the dividend, which will be paid on the 31st of August.

The company's next dividend payment will be US$1.00 per share. Last year, in total, the company distributed US$4.00 to shareholders. Based on the last year's worth of payments, NVE stock has a trailing yield of around 5.1% on the current share price of $78.63. If you buy this business for its dividend, you should have an idea of whether NVE's dividend is reliable and sustainable. As a result, readers should always check whether NVE has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for NVE

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. NVE distributed an unsustainably high 150% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether NVE generated enough free cash flow to afford its dividend. Over the past year it paid out 144% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Cash is slightly more important than profit from a dividend perspective, but given NVE's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

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

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that NVE's earnings per share have remained effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Earnings are not growing much and NVE paid out a lot more than it earned in profit last year. This makes the dividend look potentially unsustainable in the long run.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. NVE's dividend payments are effectively flat on where they were six years ago.

To Sum It Up

Is NVE worth buying for its dividend? Earnings per share are effectively flat, plus NVE's dividend is not well covered by either earnings or cash flow, which is not great. It's not that we think NVE is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of NVE don't faze you, it's worth being mindful of the risks involved with this business. To help with this, we've discovered 1 warning sign for NVE that you should be aware of before investing in their 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.