Melexis NV (EBR:MELE) is about to trade ex-dividend in the next three days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company’s books to be eligible for a dividend payment. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, Melexis investors that purchase the stock on or after the 18th of October will not receive the dividend, which will be paid on the 20th of October.
The company’s upcoming dividend is €0.91 a share, following on from the last 12 months, when the company distributed a total of €2.60 per share to shareholders. Calculating the last year’s worth of payments shows that Melexis has a trailing yield of 3.7% on the current share price of €71. 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 Melexis can afford its dividend, and if the dividend could grow.
Check out our latest analysis for Melexis
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. Melexis paid out 63% of its earnings to investors last year, a normal payout level for most businesses. 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. Over the last year, it paid out more than three-quarters (84%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
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. For this reason, we’re glad to see Melexis’s earnings per share have risen 12% per annum over the last five years. The company paid out most of its earnings as dividends over the last year, even though business is booming and earnings per share are growing rapidly. We’re surprised that management has not elected to reinvest more in the business to accelerate growth further.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Melexis has delivered an average of 16% per year annual increase in its dividend, based on the past 10 years of dividend payments. It’s great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
Has Melexis got what it takes to maintain its dividend payments? It’s good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. However, we’d also note that Melexis is paying out more than half of its earnings and cash flow as profits, which could limit the dividend growth if earnings growth slows. Overall we’re not hugely bearish on the stock, but there are likely better dividend investments out there.
While it’s tempting to invest in Melexis for the dividends alone, you should always be mindful of the risks involved. To help with this, we’ve discovered 1 warning sign for Melexis that you should be aware of before investing in their shares.
If you’re in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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