It Might Not Be A Great Idea To Buy Melexis NV (EBR:MELE) For Its Next Dividend

Readers hoping to buy Melexis NV (EBR:MELE) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Melexis' shares before the 14th of October in order to be eligible for the dividend, which will be paid on the 16th of October.

The company's next dividend payment will be €0.91 per share. Last year, in total, the company distributed €3.70 to shareholders. Last year's total dividend payments show that Melexis has a trailing yield of 5.6% on the current share price of €65.95. 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! So we need to check whether the dividend payments are covered, and if earnings are growing.

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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. Melexis distributed an unsustainably high 115% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Melexis generated enough free cash flow to afford its dividend. Over the past year it paid out 157% of its free cash flow as dividends, which is uncomfortably 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.

As Melexis's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

View our latest analysis for Melexis

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, Melexis's earnings per share have been growing at 17% a year for the past five years. Earnings are growing pretty quickly, which is great, but it's uncomfortably to see the company paying out 115% of earnings. We're wary of fast-growing companies flaming out by over-committing themselves financially, and consider this a yellow flag.

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, 10 years ago, Melexis has lifted its dividend by approximately 14% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Final Takeaway

Is Melexis worth buying for its dividend? While it's nice to see earnings per share growing, we're curious about how Melexis intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Melexis. Every company has risks, and we've spotted 2 warning signs for Melexis (of which 1 doesn't sit too well with us!) you should know about.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.