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Readers hoping to buy CML Microsystems plc (LON:CML) 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 19th of March to receive the dividend, which will be paid on the 26th of March.
CML Microsystems's next dividend payment will be UK£0.50 per share, which looks like a nice increase on last year, when the company distributed a total of UK£0.04 to shareholders. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
See our latest analysis for CML Microsystems
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. CML Microsystems paid out more than half (52%) of its earnings last year, which is a regular payout ratio for most companies. 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 82% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.
It's positive to see that CML Microsystems'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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. CML Microsystems's earnings per share have fallen at approximately 14% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. CML Microsystems has delivered 1.3% dividend growth per year on average over the past 10 years.
To Sum It Up
Is CML Microsystems an attractive dividend stock, or better left on the shelf? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. Bottom line: CML Microsystems has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.