Today we’ll take a closer look at Avnet, Inc. (NASDAQ:AVT) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it’s common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
In this case, Avnet likely looks attractive to dividend investors, given its 3.1% dividend yield and seven-year payment history. It sure looks interesting on these metrics – but there’s always more to the story. During the year, the company also conducted a buyback equivalent to around 9.0% of its market capitalisation. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Although Avnet pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.
Avnet’s cash payout ratio last year was 13%, which is quite low and suggests that the dividend was thoroughly covered by cash flow.
Is Avnet’s Balance Sheet Risky?
Given Avnet is paying a dividend but reported a loss over the past year, we need to check its balance sheet for signs of financial distress. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA is a measure of a company’s total debt. Net interest cover measures the ability to meet interest payments. Essentially we check that a) the company does not have too much debt, and b) that it can afford to pay the interest. With net debt of 2.35 times its EBITDA, Avnet has a noticeable amount of debt, although if business stays steady, this may not be overly concerning.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. Interest cover of 1.90 times its interest expense is starting to become a concern for Avnet, and be aware that lenders may place additional restrictions on the company as well.
Consider getting our latest analysis on Avnet’s financial position here.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Avnet has been paying a dividend for the past seven years. The company has been paying a stable dividend for a while now, which is great. However we’d prefer to see consistency for a few more years before giving it our full seal of approval. During the past seven-year period, the first annual payment was US$0.6 in 2013, compared to US$0.8 last year. Dividends per share have grown at approximately 4.9% per year over this time.
It’s good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn’t want to depend on this dividend too heavily.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend’s purchasing power over the long term. Over the past five years, it looks as though Avnet’s EPS have declined at around 41% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Avnet’s earnings per share, which support the dividend, have been anything but stable.
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We’re a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Earnings per share are down, and to our mind Avnet has not been paying a dividend long enough to demonstrate its resilience across economic cycles. With this information in mind, we think Avnet may not be an ideal dividend stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we’ve identified 1 warning sign for Avnet that investors need to be conscious of moving forward.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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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.
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