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Dividend paying stocks like STMicroelectronics N.V. (EPA:STM) 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. 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.
Investors might not know much about STMicroelectronics’s dividend prospects, even though it has been paying dividends for the last nine years and offers a 1.4% yield. A 1.4% yield is not inspiring, but the longer payment history has some appeal. The company also bought back stock during the year, equivalent to approximately 0.9% of the company’s market capitalisation at the time. There are a few simple ways to reduce the risks of buying STMicroelectronics for its dividend, and we’ll go through these below.Click the interactive chart for our full dividend analysis
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 18% of STMicroelectronics’s profits were paid out as dividends in the last 12 months. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. STMicroelectronics paid out a conservative 48% of its free cash flow as dividends last year.
We update our data on STMicroelectronics every 24 hours, so you can always get our latest analysis of its financial health, 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. The first recorded dividend for STMicroelectronics, in the last decade, was nine years ago. It’s good to see that STMicroelectronics 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 US$0.28 in 2010, compared to US$0.24 last year. This works out to be a decline of approximately -1.7% per year over that time. STMicroelectronics’s dividend has been cut sharply at least once, so it hasn’t fallen by -1.7% every year, but this is a decent approximation of the long term change.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It’s good to see STMicroelectronics has been growing its earnings per share at 62% a year over the past 5 years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.
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. Firstly, we like that STMicroelectronics has low and conservative payout ratios. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. STMicroelectronics performs highly under this analysis, although it falls slightly short of our exacting standards. At the right valuation, it could be a solid dividend prospect.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 16 STMicroelectronics analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.