Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Texas Instruments Incorporated (NASDAQ:TXN) is about to trade ex-dividend in the next two days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. This means that investors who purchase Texas Instruments' shares on or after the 31st of October will not receive the dividend, which will be paid on the 12th of November.
The company's upcoming dividend is US$1.36 a share, following on from the last 12 months, when the company distributed a total of US$5.44 per share to shareholders. Looking at the last 12 months of distributions, Texas Instruments has a trailing yield of approximately 2.6% on its current stock price of US$206.93. If you buy this business for its dividend, you should have an idea of whether Texas Instruments'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.
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 Texas Instruments paid out 96% 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 Texas Instruments generated enough free cash flow to afford its dividend. It paid out an unsustainably high 323% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Texas Instruments is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.
As Texas Instruments'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 the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's not encouraging to see that Texas Instruments's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Texas Instruments has delivered an average of 16% per year annual increase in its dividend, based on the past 10 years of dividend payments.
To Sum It Up
Is Texas Instruments an attractive dividend stock, or better left on the shelf? Not only are earnings per share flat, but Texas Instruments is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Texas Instruments.
With that in mind though, if the poor dividend characteristics of Texas Instruments don't faze you, it's worth being mindful of the risks involved with this business. For example, Texas Instruments has 2 warning signs (and 1 which is a bit concerning) we think you should know about.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
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.
