Power Integrations (NASDAQ:POWI) Has Announced A Dividend Of $0.21

The board of Power Integrations, Inc. (NASDAQ:POWI) has announced that it will pay a dividend of $0.21 per share on the 30th of June. This makes the dividend yield 1.7%, which will augment investor returns quite nicely.

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Power Integrations' Future Dividend Projections Appear Well Covered By Earnings

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, Power Integrations' dividend was higher than its profits, but the free cash flows quite comfortably covered it. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

Over the next year, EPS is forecast to expand by 185.6%. If the dividend continues along recent trends, we estimate the payout ratio will be 50%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

See our latest analysis for Power Integrations

Power Integrations Has A Solid Track Record

The company has an extended history of paying stable dividends. The dividend has gone from an annual total of $0.24 in 2015 to the most recent total annual payment of $0.84. This means that it has been growing its distributions at 13% per annum over that time. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.

The Dividend Has Limited Growth Potential

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Unfortunately things aren't as good as they seem. Power Integrations' earnings per share has shrunk at 28% a year over the past five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.

Our Thoughts On Power Integrations' Dividend

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Power Integrations' payments, as there could be some issues with sustaining them into the future. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 3 warning signs for Power Integrations that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield 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.