Why It Might Not Make Sense To Buy Microchip Technology Incorporated (NASDAQ:MCHP) For Its Upcoming Dividend

Microchip Technology Incorporated (NASDAQ:MCHP) is about to trade ex-dividend in the next 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Microchip Technology's shares on or after the 20th of May will not receive the dividend, which will be paid on the 4th of June.

The company's next dividend payment will be US$0.41 per share, on the back of last year when the company paid a total of US$1.65 to shareholders. Last year's total dividend payments show that Microchip Technology has a trailing yield of 1.1% on the current share price of $145.47. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Microchip Technology

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 distributed an unsustainably high 111% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious.

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. That's why it's not ideal to see Microchip Technology's earnings per share have been shrinking at 3.3% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Microchip Technology has increased its dividend at approximately 1.9% a year on average.

The Bottom Line

Is Microchip Technology worth buying for its dividend? Earnings per share are in decline and Microchip Technology is paying out what we feel is an uncomfortably high percentage of its profit as dividends. It's not that we hate the business, but we feel that these characeristics are not desirable for investors seeking a reliable dividend stock to own for the long term. This is not an overtly appealing combination of characteristics, and we're just not that interested in this company's dividend.

With that being said, if you're still considering Microchip Technology as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 5 warning signs for Microchip Technology that we strongly recommend you have a look at before investing in the company.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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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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