Readers wishing to buy InterDigital, Inc. (NASDAQ: IDCC) for its dividend will have to act shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day before the record date, which is the day on which shareholders must be on the books of the company to receive a dividend. The ex-dividend date is important because the settlement process involves two full business days. So if you miss this date, you would not appear on the company’s books on the date of registration. Thus, you can buy InterDigital shares before October 12 in order to receive the dividend that the company will pay on October 27.
The company’s next dividend will be US $ 0.35 per share, compared to last year when the company paid a total of US $ 1.40 to shareholders. Last year’s total dividend payouts show InterDigital has a sliding 2.1% return on the current share price of $ 67.64. We love to see companies pay a dividend, but it’s also important to make sure that laying the golden eggs is not going to kill our goose that lays the golden eggs! It is therefore necessary to check whether dividend payments are covered and whether profits are growing.
Check out our latest review for InterDigital
Dividends are usually paid out of the company’s profits, so if a company pays more than it earned, its dividend is usually at risk of being reduced. InterDigital paid 146% of the profits over the past year, which in our opinion is generally not sustainable, unless there are mitigating characteristics such as unusually high cash flow or a balance of important cash. Having said that, even very profitable companies can sometimes not generate enough cash to pay the dividend, which is why we always need to check if the dividend is covered by the cash flow. InterDigital paid out more free cash flow than it generated – 115%, to be precise – last year, which we think is pretty high. It’s hard to consistently pay more money than you generate without borrowing or using company cash, so we wonder how the company justifies this level of payment.
InterDigital has a large net cash position on the balance sheet, which could fund large dividends for a period of time, if the company so wished. Yet savvy investors know that it is better to weigh dividends against cash and profits generated by the company. Paying cash dividends to the balance sheet is not sustainable in the long term.
Cash is slightly more important than earnings from a dividend perspective, but given that InterDigital’s payments were not well covered by earnings or cash flow, we are concerned about the sustainability of this dividend.
Click here to view the company’s payout ratio, as well as analysts’ estimates of its future dividends.
Have profits and dividends increased?
Companies with declining profits are tricky from a dividend standpoint. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold massively at the same time. Readers will then understand why we are concerned that InterDigital’s earnings per share have fallen 22% per year over the past five years. Such a sudden drop casts doubt on the future sustainability of the dividend.
Many investors will assess a company’s dividend yield by evaluating how much dividend payments have changed over time. InterDigital has generated an average annual increase of 13% per annum in its dividend, based on dividend payments over the past 10 years. It’s intriguing, but the combination of growing dividends despite falling profits can usually only be achieved by paying a higher percentage of the profits. InterDigital is already paying 146% of its profits, and with declining profits, we believe this dividend is unlikely to grow rapidly in the future.
From a dividend perspective, should investors buy or avoid InterDigital? Not only is earnings per share falling, but InterDigital is paying an uncomfortably high percentage of its earnings and cash flow to shareholders in the form of dividends. This is a clearly suboptimal combination which generally suggests that the dividend may be reduced. If not now, then maybe in the future. Overall, this doesn’t seem like the most suitable dividend-paying stock for a long-term buy and hold investor.
However, if you are still interested in InterDigital and want to learn more, it will be very helpful for you to know the risks that this title faces. For example, InterDigital has 3 warning signs (and 1 which is a bit disturbing) we think you should be aware of.
If you are in the dividend-paying stock market, we recommend that you check out our list of the highest dividend-paying stocks with a yield above 2% and a future dividend.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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