Is It Smart To Buy NetApp, Inc. (NASDAQ:NTAP) Before It Goes Ex-Dividend?

Simply Wall St

It looks like NetApp, Inc. (NASDAQ:NTAP) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 2nd of April will not receive this dividend, which will be paid on the 22nd of April.

NetApp's next dividend payment will be US$0.48 per share, and in the last 12 months, the company paid a total of US$1.92 per share. Based on the last year's worth of payments, NetApp stock has a trailing yield of around 4.8% on the current share price of $40.23. If you buy this business for its dividend, you should have an idea of whether NetApp's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for NetApp

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. NetApp paid out a comfortable 43% of its profit last year. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 46% of its free cash flow as dividends, a comfortable payout level for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

NasdaqGS:NTAP Historical Dividend Yield March 28th 2020

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, NetApp's earnings per share have been growing at 18% a year for the past five years. Earnings per share have been growing rapidly and the company is retaining a majority of its earnings within the business. This will make it easier to fund future growth efforts and we think this is an attractive combination - plus the dividend can always be increased later.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. NetApp has delivered 18% dividend growth per year on average over the past seven years. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

Final Takeaway

Should investors buy NetApp for the upcoming dividend? We love that NetApp is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. NetApp looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. To that end, you should learn about the 4 warning signs we've spotted with NetApp (including 1 which shouldn't be ignored).

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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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