NetApp (NASDAQ:NTAP) Is Increasing Its Dividend To US$0.50

NetApp, Inc. (NASDAQ:NTAP) will increase its dividend on the 28th of July to US$0.50. This will take the annual payment to 2.4% of the stock price, which is above what most companies in the industry pay.

View our latest analysis for NetApp

NetApp's Earnings Easily Cover the Distributions

A big dividend yield for a few years doesn't mean much if it can't be sustained. The last dividend was quite easily covered by NetApp's earnings. This means that a large portion of its earnings are being retained to grow the business.

The next year is set to see EPS grow by 7.7%. If the dividend continues on this path, the payout ratio could be 66% by next year, which we think can be pretty sustainable going forward.

NetApp Is Still Building Its Track Record

It is great to see that NetApp has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. Since 2013, the dividend has gone from US$0.60 to US$2.00. This implies that the company grew its distributions at a yearly rate of about 16% over that duration. NetApp has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

The Dividend Looks Likely To Grow

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. NetApp has impressed us by growing EPS at 33% per year over the past five years. NetApp is clearly able to grow rapidly while still returning cash to shareholders, positioning it to become a strong dividend payer in the future.

NetApp Looks Like A Great Dividend Stock

Overall, we think this could be an attractive income stock, and it is only getting better by paying a higher dividend this year. Distributions are quite easily covered by earnings, which are also being converted to cash flows. All in all, this checks a lot of the boxes we look for when choosing an income stock.

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. Taking the debate a bit further, we've identified 2 warning signs for NetApp that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.

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