We Wouldn't Be Too Quick To Buy Microchip Technology Incorporated (NASDAQ:MCHP) Before It Goes Ex-Dividend

Readers hoping to buy Microchip Technology Incorporated (NASDAQ:MCHP) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Microchip Technology's shares before the 24th of November in order to be eligible for the dividend, which will be paid on the 9th of December.

The company's next dividend payment will be US$0.455 per share, on the back of last year when the company paid a total of US$1.82 to shareholders. Looking at the last 12 months of distributions, Microchip Technology has a trailing yield of approximately 3.6% on its current stock price of US$50.87. 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 Microchip Technology has been able to grow its dividends, or if the dividend might be cut.

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Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Microchip Technology's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If Microchip Technology didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Microchip Technology paid out more free cash flow than it generated - 137%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

See our latest analysis for Microchip Technology

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Microchip Technology reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Microchip Technology has lifted its dividend by approximately 9.8% a year on average.

Remember, you can always get a snapshot of Microchip Technology's financial health, by checking our visualisation of its financial health, here.

To Sum It Up

Should investors buy Microchip Technology for the upcoming dividend? First, it's not great to see the company paying a dividend despite being loss-making over the last year. Second, the dividend was not well covered by cash flow." It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

So if you're still interested in Microchip Technology despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example - Microchip Technology has 2 warning signs we think you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.