Don't Race Out To Buy NVE Corporation (NASDAQ:NVEC) Just Because It's Going Ex-Dividend

NVE Corporation (NASDAQ:NVEC) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 15th of May in order to be eligible for this dividend, which will be paid on the 29th of May.

NVE'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 has a trailing yield of 6.9% on the current stock price of $58. If you buy this business for its dividend, you should have an idea of whether NVE's dividend is reliable and sustainable. So we need to investigate whether NVE can afford its dividend, and if the dividend could grow.

View our latest analysis for NVE

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. NVE distributed an unsustainably high 133% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. NVE paid out more free cash flow than it generated - 122%, to be precise - last year, which we think is concerningly 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.

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 earnings fall far enough, the company could be forced to cut its dividend. That explains why we're not overly excited about NVE's flat earnings over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. 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.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. NVE's dividend payments are broadly unchanged compared to where they were five years ago.

The Bottom Line

Is NVE worth buying for its dividend? NVE is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, at the same time as its earnings per share are struggling to grow. It's not that we think NVE is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in NVE despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. In terms of investment risks, we've identified 2 warning signs with NVE and understanding them should be part of your investment process.

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.

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.

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