Dividend paying stocks like BE Semiconductor Industries N.V. (AMS:BESI) tend to be popular with investors, and for good reason – some research suggests a significant amount of all stock market returns come from reinvested dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
In this case, BE Semiconductor Industries likely looks attractive to dividend investors, given its 3.9% dividend yield and nine-year payment history. We’d agree the yield does look enticing. The company also returned around 2.7% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple analysis can reduce the risk of holding BE Semiconductor Industries for its dividend, and we’ll focus on the most important aspects below.
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Payout ratios
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. In the last year, BE Semiconductor Industries paid out 90% of its profit as dividends. Its payout ratio is quite high, and the dividend is not well covered by earnings. If earnings are growing or the company has a large cash balance, this might be sustainable – still, we think it is a concern.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. With a cash payout ratio of 117%, BE Semiconductor Industries’s dividend payments are poorly covered by cash flow. Cash is slightly more important than profit from a dividend perspective, but given BE Semiconductor Industries’s payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
With a strong net cash balance, BE Semiconductor Industries investors may not have much to worry about in the near term from a dividend perspective.
Remember, you can always get a snapshot of BE Semiconductor Industries’s latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
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. The first recorded dividend for BE Semiconductor Industries, in the last decade, was nine years ago. It’s good to see that BE Semiconductor Industries has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we’re concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was €0.10 in 2011, compared to €1.01 last year. Dividends per share have grown at approximately 29% per year over this time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.
It’s not great to see that the payment has been cut in the past. We’re generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.
Dividend Growth Potential
With a relatively unstable dividend, it’s even more important to evaluate if earnings per share (EPS) are growing – it’s not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. BE Semiconductor Industries has grown its earnings per share at 3.4% per annum over the past five years. This level of earnings growth is low, and the company is paying out 90% of its profit. Limited recent earnings growth and a high payout ratio makes it hard for us to envision strong future dividend growth, unless the company should have substantial pricing power or some form of competitive advantage.
Conclusion
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. It’s a concern to see that the company paid out such a high percentage of its earnings and cashflow as dividends. Second, earnings growth has been ordinary, and its history of dividend payments is chequered – having cut its dividend at least once in the past. There are a few too many issues for us to get comfortable with BE Semiconductor Industries from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we’ve identified 3 warning signs for BE Semiconductor Industries (1 is a bit concerning!) that you should be aware of before investing.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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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