Don't Buy MTS Systems Corporation (NASDAQ:MTSC) For Its Next Dividend Without Doing These Checks

Readers hoping to buy MTS Systems Corporation (NASDAQ:MTSC) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 13th of December to receive the dividend, which will be paid on the 30th of December.

MTS Systems's next dividend payment will be US$0.30 per share. Last year, in total, the company distributed US$1.20 to shareholders. Looking at the last 12 months of distributions, MTS Systems has a trailing yield of approximately 2.5% on its current stock price of $47.26. 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 MTS Systems has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for MTS Systems

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. MTS Systems paid out more than half (54%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether MTS Systems generated enough free cash flow to afford its dividend. Dividends consumed 51% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's positive to see that MTS Systems's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's not ideal to see MTS Systems's earnings per share have been shrinking at 4.1% 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. MTS Systems has delivered an average of 7.2% per year annual increase in its dividend, based on the past ten years of dividend payments. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

Final Takeaway

From a dividend perspective, should investors buy or avoid MTS Systems? While earnings per share are shrinking, it's encouraging to see that at least MTS Systems's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. It's not that we think MTS Systems is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Ever wonder what the future holds for MTS Systems? See what the two analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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