Here's Why We're Wary Of Buying CML Microsystems' (LON:CML) For Its Upcoming Dividend

CML Microsystems plc (LON:CML) stock is about to trade ex-dividend in 3 days. Ex-dividend means that investors that purchase the stock on or after the 3rd of December will not receive this dividend, which will be paid on the 18th of December.

CML Microsystems's next dividend payment will be UK£0.02 per share, on the back of last year when the company paid a total of UK£0.04 to shareholders. Based on the last year's worth of payments, CML Microsystems stock has a trailing yield of around 1.5% on the current share price of £2.75. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for CML Microsystems

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. CML Microsystems paid out more than half (52%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 82% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see CML Microsystems's earnings per share have dropped 14% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last nine years, CML Microsystems has lifted its dividend by approximately 1.5% a year on average.

Final Takeaway

Is CML Microsystems worth buying for its dividend? While earnings per share are shrinking, it's encouraging to see that at least CML Microsystems's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. Bottom line: CML Microsystems has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

So if you're still interested in CML Microsystems despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For instance, we've identified 3 warning signs for CML Microsystems (1 is a bit concerning) you should be aware of.

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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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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