Is Nera Telecommunications Ltd (SGX:N01) A Risky Dividend Stock?

Is Nera Telecommunications Ltd (SGX:N01) a good dividend stock? How would you know? A dividend paying company with growing earnings can be rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

In this case, Nera Telecommunications likely looks attractive to investors, given its 8.2% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. Some simple analysis can offer a lot of insight when buying a company for its dividend, and we’ll go through these below.

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SGX:N01 Historical Dividend Yield, April 17th 2019
SGX:N01 Historical Dividend Yield, April 17th 2019

Payout ratios

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. Nera Telecommunications paid out 117% of its profit as dividends, over the trailing twelve month period. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Nera Telecommunications paid out 52% of its cash flow as dividends last year, which does not seem unusual.

With a strong net cash balance, Nera Telecommunications investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Nera Telecommunications’s financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. Nera Telecommunications has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was S$0.03 in 2009, compared to S$0.025 last year. This works out to be a decline of approximately -1.8% per year over that time. Nera Telecommunications’s dividend hasn’t shrunk linearly at -1.8% per annum, but the CAGR is a useful estimate of the historical rate of 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 not great to see that Nera Telecommunications’s have fallen at approximately -20% over the past five years. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.

Conclusion

To summarise, shareholders should always check that Nera Telecommunications’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We’re not keen on the fact that Nera Telecommunications paid out such a high percentage of its income, although its cashflow is in better shape. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. There are a few too many issues for us to get comfortable with Nera Telecommunications from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

See if management have put their money where their mouth is, by checking insider shareholdings in Nera Telecommunications stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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 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. Thank you for reading.