Regular readers will know we love our dividends at Simply Wall St, which is why it’s exciting to see KLA Society (NASDAQ:KLAC) is set to trade ex-dividend in the next 2 days. The ex-dividend date is one business day before the record date, which is the latest date by which shareholders must be present on the books of the company to be eligible for payment of a dividend. It is important to know the ex-dividend date, because any trade in the stock must have settled on or before the record date. This means you will need to buy KLA shares by August 12 to receive the dividend, which will be paid on September 1.
The company’s next dividend is $1.30 per share, following the last 12 months when the company distributed a total of $4.20 per share to shareholders. Based on last year’s payouts, KLA has a 1.1% return on the current stock price of $387.68. If you’re buying this company for its dividend, you should have some idea of the reliability and sustainability of KLA’s dividend. We need to see if the dividend is covered by earnings and if it increases.
Dividends are usually paid out of company earnings, so if a company pays out more than it has earned, its dividend is usually at risk of being reduced. The KLA paid out only 19% of its profits last year, which we believe is relatively low and leaves plenty of room for unforeseen circumstances. Still, cash flow is usually more important than earnings in assessing the sustainability of dividends, so we always need to check whether the company has generated enough cash to pay its dividend. It paid out 21% of its free cash flow as dividends last year, which is conservative.
It is encouraging to see that the dividend is covered by both earnings and cash flow. This generally suggests that the dividend is sustainable, as long as earnings don’t drop precipitously.
Click here to see the company’s payout ratio, as well as analysts’ estimates of its future dividends.
Have earnings and dividends increased?
Companies with consistently rising earnings per share tend to create the best dividend-paying stocks because they generally find it easier to increase dividends per share. If earnings fall and the company is forced to cut its dividend, investors could see the value of their investment go up in smoke. That’s why it’s heartening to see KLA revenues skyrocketing, up 32% a year over the past five years. KLA looks like a real growing company, with earnings per share growing at a breakneck pace and the company reinvesting most of its profits back into the business.
Most investors primarily gauge a company’s dividend prospects by checking the historical rate of dividend growth. KLA has recorded dividend growth of 12% per year on average over the past 10 years. It’s exciting to see that earnings and dividends per share have grown rapidly over the past few years.
From a dividend perspective, should investors buy or avoid KLA? We love that KLA is growing its earnings per share while simultaneously paying out a small percentage of its earnings and cash flow. These characteristics suggest that the company is reinvesting in the growth of its business, while the conservative payout ratio also implies a reduced risk of dividend reduction in the future. There’s a lot to like about KLA, and we’d prioritize a closer look.
On that note, you’ll want to research the risks the KLA faces. Every business has risks, and we’ve spotted 2 warning signs for the KLA (1 of which is a little worrying!) that you should know about.
As a general rule, we don’t recommend simply buying the first dividend-paying stock you see. Here is a curated list of attractive stocks that are strong dividend payers.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.