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

Simply Wall St

It looks like NVE Corporation (NASDAQ:NVEC) is about to go ex-dividend in the next 4 days. Investors can purchase shares before the 1st of November in order to be eligible for this dividend, which will be paid on the 29th of November.

NVE's next dividend payment will be US$1.0 per share. Last year, in total, the company distributed US$4.0 to shareholders. Last year's total dividend payments show that NVE has a trailing yield of 6.2% on the current share price of $64.5. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for NVE

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. NVE distributed an unsustainably high 141% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. Over the past year it paid out 145% 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 payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

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

NasdaqCM:NVEC Historical Dividend Yield, October 27th 2019

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at NVE, with earnings per share up 4.3% on average over the last five years. Minimal earnings growth, combined with concerningly high payout ratios suggests that NVE is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. NVE's dividend payments are broadly unchanged compared to where they were four years ago.

The Bottom Line

Should investors buy NVE for the upcoming dividend? NVE is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Want to learn more about NVE? Here's a visualisation of its historical rate of revenue and earnings growth.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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.