Here's Why We're Wary Of Buying BE Semiconductor Industries' (AMS:BESI) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see BE Semiconductor Industries N.V. (AMS:BESI) is about to trade ex-dividend in the next four days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, BE Semiconductor Industries investors that purchase the stock on or after the 29th of April will not receive the dividend, which will be paid on the 3rd of May.

The company's next dividend payment will be €2.15 per share. Last year, in total, the company distributed €2.15 to shareholders. Calculating the last year's worth of payments shows that BE Semiconductor Industries has a trailing yield of 1.6% on the current share price of €133.55. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether BE Semiconductor Industries can afford its dividend, and if the dividend could grow.

Check out our latest analysis for BE Semiconductor Industries

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. Last year BE Semiconductor Industries paid out 94% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the past year it paid out 123% 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.

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.

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at BE Semiconductor Industries, with earnings per share up 4.7% on average over the last five years. With limited earnings growth and paying out a concerningly high percentage of its earnings, the prospects of future dividend growth don't look so bright here.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. BE Semiconductor Industries has delivered 35% dividend growth per year on average over the past 10 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Has BE Semiconductor Industries got what it takes to maintain its dividend payments? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that being said, if you're still considering BE Semiconductor Industries as an investment, you'll find it beneficial to know what risks this stock is facing. For example, BE Semiconductor Industries has 2 warning signs (and 1 which shouldn't be ignored) we think 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.