It looks like Power Integrations, Inc. (NASDAQ:POWI) will trade ex-dividend for the next 4 days. The ex-dividend date is one day before the record date, which is the date on which shareholders must be on the company’s books to receive a dividend. The ex-dividend date is important because trading takes at least two business days each time a share is bought or sold. In other words, investors can buy Power Integrations shares before August 30th to be eligible for the dividend, which will be paid on September 30th.
The company’s next dividend payment will be $0.20 per share. Over the last 12 months, the company paid a total of $0.80 per share. Last year’s total dividend payments show that Power Integrations has a yield of 1.2% on the current share price of $67.90. If you are buying this company for its dividend, you should have an idea of whether Power Integrations’ dividend is reliable and sustainable. We need to see if the dividend is covered by earnings and if it is growing.
Check out our latest analysis for Power Integrations
Dividends are typically paid out of company profits, so if a company pays out more than it earns, its dividend is usually at higher risk of being cut. Last year, Power Integrations paid out 105% of its profits to shareholders as dividends, suggesting the dividend is not well covered by profits. However, cash flows are even more important than profits when assessing a dividend, so we need to look at whether the company generated enough cash to pay its distribution. Last year, it paid out more than three-quarters (83%) of its generated free cash flow, which is quite a lot and may be starting to limit reinvestment in the business.
It’s good to see that while Power Integrations’ dividends weren’t covered by profits, they’re at least affordable from a cash perspective. However, if the company were to repeatedly pay a dividend higher than its profits, we’d be concerned. Very few companies are able to consistently pay dividends higher than their reported profits.
Click here to see the company’s payout ratio as well as analyst estimates of its future dividends.
Have earnings and dividends increased?
Companies with declining earnings are tricky from a dividend perspective. If the business goes into crisis and the dividend is cut, the value of the company could fall rapidly. Power Integrations’ earnings per share have fallen by about 8.7% annually over the past five years. Such a sharp decline raises doubts about the future sustainability of the dividend.
Many investors judge a company’s dividend performance by how dividend payments have changed over time. Over the past 10 years, Power Integrations has increased its dividend by an average of about 15% per year. The only way to pay higher dividends when earnings are falling is to either pay out a larger percentage of earnings, spend cash from the balance sheet, or borrow the money. Power Integrations already pays out a high percentage of its earnings, so without earnings growth, we doubt this dividend will increase much in the future.
Last Takeaway
Should investors buy or avoid Power Integrations from a dividend perspective? It’s never nice when a company’s earnings per share decline. Additionally, Power Integrations pays out a fairly high percentage of its earnings and more than half of its cash flow, so it’s hard to judge whether the company is reinvesting enough in its business to improve its situation. It’s not that we think Power Integrations is a bad company, but these traits generally don’t translate into stellar dividend performance.
However, if you are still interested in Power Integrations and want to learn more about it, it is very helpful to know what risks this stock poses. In terms of investment risks: We have identified 2 warning signs with Power Integrations and understanding them should be part of your investment process.
A common mistake when investing is to buy the first interesting stock you see. Here you can find a complete list of high dividend stocks.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
