Is Nera Telecommunications Ltd (SGX:N01) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
A high yield and a long history of paying dividends is an appealing combination for Nera Telecommunications. It would not be a surprise to discover that many investors buy it for the dividends. Some simple analysis can reduce the risk of holding Nera Telecommunications for its dividend, and we'll focus on the most important aspects below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Nera Telecommunications paid out 140% of its profit as dividends. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Unfortunately, while Nera Telecommunications pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.
With a strong net cash balance, Nera Telecommunications investors may not have much to worry about in the near term from a dividend perspective.
Remember, you can always get a snapshot of Nera Telecommunications's latest financial position, by checking our visualisation of its financial health.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Nera Telecommunications's dividend payments. Its dividend payments have declined on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was S$0.03 in 2010, compared to S$0.025 last year. This works out to be a decline of approximately 1.8% per year over that time. Nera Telecommunications's dividend hasn't shrunk linearly at 1.8% per annum, but the CAGR is a useful estimate of the historical rate of change.
When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Over the past five years, it looks as though Nera Telecommunications's EPS have declined at around 26% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Nera Telecommunications paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Earnings per share are down, and Nera Telecommunications's dividend has been cut at least once in the past, which is disappointing. Using these criteria, Nera Telecommunications looks quite suboptimal from a dividend investment perspective.
Now, if you want to look closer, it would be worth checking out our free research on Nera Telecommunications management tenure, salary, and performance.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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