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Dividend paying stocks like Quanex Building Products Corporation (NYSE:NX) tend to be popular with investors, and for good reason – some research shows that a significant amount of all stock market returns come from reinvested dividends. 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.
A 1.9% yield is nothing to get excited about, but investors probably think the long payment history suggests Quanex Building Products has some staying power. The company also bought back stock during the year, equivalent to approximately 5.8% of the company’s market capitalisation at the time. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.Explore this interactive chart for our latest analysis on Quanex Building Products!
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to be form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 54% of Quanex Building Products’s profits were paid out as dividends in the last 12 months. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Quanex Building Products paid out 14% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable.
Is Quanex Building Products’s Balance Sheet Risky?
As Quanex Building Products has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures a company’s total debt load relative to its earnings (lower = less debt), while net interest cover measures the company’s ability to pay the interest on its debt (higher = greater ability to pay interest costs). With net debt of 2.42 times its EBITDA, Quanex Building Products’s debt burden is within a normal range for most listed companies.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. Interest cover of less than 5x its interest expense is starting to become a concern for Quanex Building Products, and be aware that lenders may place additional restrictions on the company as well.
We update our data on Quanex Building Products every 24 hours, so you can always get our latest analysis of its financial health, here.
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 ten-year period, the first annual payment was US$0.12 in 2009, compared to US$0.32 last year. Dividends per share have grown at approximately 10% per year over this time.
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. It’s good to see Quanex Building Products has been growing its earnings per share at 44% a year over the past 5 years. With recent, rapid earnings per share growth and a payout ratio of 54%, this business could be an interesting prospect if growth can be maintained.
To summarise, shareholders should always check that Quanex Building Products’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Quanex Building Products has an acceptable payout ratio and its dividend is well covered by cashflow. That said, we were glad to see it growing earnings and paying a fairly consistent dividend. Quanex Building Products performs highly under this analysis, although it falls slightly short of our exacting standards. At the right valuation, it could be a solid dividend prospect.
Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 4 analysts we track are forecasting for Quanex Building Products for free with public analyst estimates for the company.
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 firstname.lastname@example.org. 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.