Don't Buy Davicom Semiconductor, Inc. (TWSE:3094) For Its Next Dividend Without Doing These Checks

It looks like Davicom Semiconductor, Inc. (TWSE:3094) is about to go ex-dividend in the next 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Therefore, if you purchase Davicom Semiconductor's shares on or after the 19th of June, you won't be eligible to receive the dividend, when it is paid on the 11th of July.

The company's upcoming dividend is NT$0.61 a share, following on from the last 12 months, when the company distributed a total of NT$1.00 per share to shareholders. Based on the last year's worth of payments, Davicom Semiconductor stock has a trailing yield of around 3.2% on the current share price of NT$31.40. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Davicom Semiconductor has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Davicom Semiconductor

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Davicom Semiconductor distributed an unsustainably high 145% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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 an unsustainably high 281% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Davicom Semiconductor is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

Davicom Semiconductor does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Cash is slightly more important than profit from a dividend perspective, but given Davicom Semiconductor'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 how much of its profit Davicom Semiconductor paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're not enthused to see that Davicom Semiconductor's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. Minimal earnings growth, combined with concerningly high payout ratios suggests that Davicom Semiconductor is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Davicom Semiconductor has delivered an average of 2.4% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Final Takeaway

From a dividend perspective, should investors buy or avoid Davicom Semiconductor? Earnings per share are effectively flat, plus Davicom Semiconductor's dividend is not well covered by either earnings or cash flow, which is not great. It's not that we think Davicom Semiconductor is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of Davicom Semiconductor don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 2 warning signs for Davicom Semiconductor that we strongly recommend you have a look at before investing in the company.

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.

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