Microchip Technology (NASDAQ:MCHP) Will Pay A Larger Dividend Than Last Year At $0.455

Microchip Technology Incorporated (NASDAQ:MCHP) has announced that it will be increasing its dividend from last year's comparable payment on the 6th of December to $0.455. This will take the annual payment to 2.5% of the stock price, which is above what most companies in the industry pay.

Check out our latest analysis for Microchip Technology

Microchip Technology's Payment Could Potentially Have Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, Microchip Technology's dividend was higher than its profits, but the free cash flows quite comfortably covered it. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

The next year is set to see EPS grow by 150.8%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 54% which would be quite comfortable going to take the dividend forward.

Microchip Technology Has A Solid Track Record

The company has an extended history of paying stable dividends. The dividend has gone from an annual total of $0.71 in 2014 to the most recent total annual payment of $1.82. This implies that the company grew its distributions at a yearly rate of about 9.9% over that duration. The dividend has been growing very nicely for a number of years, and has given its shareholders some nice income in their portfolios.

Dividend Growth Could Be Constrained

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. It's encouraging to see that Microchip Technology has been growing its earnings per share at 13% a year over the past five years. Although per-share earnings are growing at a credible rate, the massive payout ratio may limit growth in the company's future dividend payments.

Our Thoughts On Microchip Technology's Dividend

Overall, we always like to see the dividend being raised, but we don't think Microchip Technology will make a great income stock. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We don't think Microchip Technology is a great stock to add to your portfolio if income is your focus.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 3 warning signs for Microchip Technology that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our collection of 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.