It looks like Communications Systems, Inc. (NASDAQ:JCS) is about to go ex-dividend in the next 3 days. Investors can purchase shares before the 13th of March in order to be eligible for this dividend, which will be paid on the 1st of April.
Communications Systems’s upcoming dividend is US$0.02 a share, following on from the last 12 months, when the company distributed a total of US$0.08 per share to shareholders. Looking at the last 12 months of distributions, Communications Systems has a trailing yield of approximately 1.5% on its current stock price of $5.41. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it’s growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Communications Systems has a low and conservative payout ratio of just 18% of its income after tax. 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. Luckily it paid out just 16% of its free cash flow last year.
It’s positive to see that Communications Systems’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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we’re concerned to see Communications Systems’s earnings per share have dropped 5.2% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Communications Systems’s dividend payments per share have declined at 18% per year on average over the past ten years, which is uninspiring. While it’s not great that earnings and dividends per share have fallen in recent years, we’re encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
To Sum It Up
Should investors buy Communications Systems for the upcoming dividend? Earnings per share are down meaningfully, although at least the company is paying out a low and conservative percentage of both its earnings and cash flow. It’s definitely not great to see earnings falling, but at least there may be some buffer before the dividend needs to be cut. Overall we’re not hugely bearish on the stock, but there are likely better dividend investments out there.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. To help with this, we’ve discovered 3 warning signs for Communications Systems that you should be aware of before investing in their shares.
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.
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