ADTRAN, Inc. (NASDAQ:ADTN) stock is about to trade ex-dividend in 3 days time. Investors can purchase shares before the 31st of July in order to be eligible for this dividend, which will be paid on the 15th of August.
ADTRAN’s next dividend payment will be US$0.09 per share. Last year, in total, the company distributed US$0.36 to shareholders. Calculating the last year’s worth of payments shows that ADTRAN has a trailing yield of 3.1% on the current share price of $11.43. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether ADTRAN has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. An unusually high payout ratio of 346% of its profit suggests something is happening other than the usual distribution of profits to shareholders. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out an unsustainably high 273% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we’re not grasping, this could signal a risk that the dividend may have to be cut in the future.
ADTRAN does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
As ADTRAN’s dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. ADTRAN’s earnings per share have plummeted approximately 33% a year over the previous five years.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. It looks like the ADTRAN dividends are largely the same as they were ten years ago. If a company’s dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.
The Bottom Line
Should investors buy ADTRAN for the upcoming dividend? Not only are earnings per share declining, but ADTRAN is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. It’s not that we think ADTRAN is a bad company, but these characteristics don’t generally lead to outstanding dividend performance.
Wondering what the future holds for ADTRAN? See what the seven analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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