Yahoo Finance Why It Might Not Make Sense To Buy Deswell Industries, Inc. (NASDAQ:DSWL) For Its Upcoming Dividend
Readers hoping to buy Deswell Industries, Inc. (NASDAQ:DSWL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, Deswell Industries investors that purchase the stock on or after the 30th of November will not receive the dividend, which will be paid on the 22nd of December.
The company's next dividend payment will be US$0.10 per share, on the back of last year when the company paid a total of US$0.20 to shareholders. Based on the last year's worth of payments, Deswell Industries stock has a trailing yield of around 6.3% on the current share price of $3.2. If you buy this business for its dividend, you should have an idea of whether Deswell Industries's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Check out our latest analysis for Deswell Industries
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year Deswell Industries paid out 94% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Deswell Industries generated enough free cash flow to afford its dividend. Deswell Industries paid out more free cash flow than it generated - 136%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
Deswell Industries 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 Deswell Industries'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.
Click here to see how much of its profit Deswell Industries paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Fortunately for readers, Deswell Industries's earnings per share have been growing at 20% a year for the past five years. It's not encouraging to see Deswell Industries paying out basically all of its earnings and cashflow to shareholders. We're glad that earnings are growing rapidly, but we're wary of the company stretching itself financially.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Deswell Industries has delivered 9.6% dividend growth per year on average over the past 10 years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
Final Takeaway
Is Deswell Industries worth buying for its dividend? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
With that being said, if you're still considering Deswell Industries as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 4 warning signs for Deswell Industries (1 can't be ignored!) that deserve your attention before investing in the shares.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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