Dividend paying stocks like Quanex Building Products Corporation (NYSE:NX) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
While Quanex Building Products's 1.7% dividend yield is not the highest, we think its lengthy payment history is quite interesting. During the year, the company also conducted a buyback equivalent to around 1.1% of its market capitalisation. Remember though, due to the recent spike in its share price, Quanex Building Products's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. There are a few simple ways to reduce the risks of buying Quanex Building Products for its dividend, and we'll go through these below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. While Quanex Building Products pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.
Quanex Building Products paid out 12% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable.
Remember, you can always get a snapshot of Quanex Building Products' latest financial position, by checking our visualisation of its financial health.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Quanex Building Products 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 stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past 10-year period, the first annual payment was US$0.1 in 2010, compared to US$0.3 last year. Dividends per share have grown at approximately 10% per year over this time.
It's rare to find a company that has grown its dividends rapidly over 10 years and not had any notable cuts, but Quanex Building Products has done it, which we really like.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Quanex Building Products' EPS have fallen by approximately 40% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Quanex Building Products' earnings per share, which support the dividend, have been anything but stable.
To summarise, shareholders should always check that Quanex Building Products' 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 Quanex Building Products paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. Moreover, earnings have been shrinking. While the dividends have been fairly steady, we'd wonder for how much longer this will be sustainable if earnings continue to decline. In sum, we find it hard to get excited about Quanex Building Products from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 3 warning signs for Quanex Building Products (of which 1 is significant!) you should know about.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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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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