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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that NXP Semiconductors N.V. (NASDAQ:NXPI) is about to go ex-dividend in just couple of days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. 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. This means that investors who purchase NXP Semiconductors' shares on or after the 14th of September will not receive the dividend, which will be paid on the 6th of October.
The company's next dividend payment will be US$0.56 per share. Last year, in total, the company distributed US$2.25 to shareholders. Based on the last year's worth of payments, NXP Semiconductors has a trailing yield of 1.1% on the current stock price of $212.12. 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 check whether the dividend payments are covered, and if earnings are growing.
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. NXP Semiconductors paid out more than half (50%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether NXP Semiconductors generated enough free cash flow to afford its dividend. The good news is it paid out just 20% of its free cash flow in the last year.
It's positive to see that NXP Semiconductors's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see NXP Semiconductors's earnings per share have dropped 10% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, three years ago, NXP Semiconductors has lifted its dividend by approximately 31% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.
To Sum It Up
Is NXP Semiconductors worth buying for its dividend? The payout ratios are within a reasonable range, implying the dividend may be sustainable. Declining earnings are a serious concern, however, and could pose a threat to the dividend in future. All things considered, we are not particularly enthused about NXP Semiconductors from a dividend perspective.
If you're not too concerned about NXP Semiconductors's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. For example - NXP Semiconductors has 2 warning signs we think 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. 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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