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Silicon Motion Technology Corporation's (NASDAQ:SIMO) investors are due to receive a payment of $0.4975 per share on 22nd of May. Based on this payment, the dividend yield on the company's stock will be 4.4%, which is an attractive boost to shareholder returns.
Silicon Motion Technology's Projected Earnings Seem Likely To Cover Future Distributions
If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, Silicon Motion Technology was paying out quite a large proportion of both earnings and cash flow, with the dividend being 206% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.
Looking forward, earnings per share is forecast to rise by 55.8% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 51% by next year, which is in a pretty sustainable range.
Check out our latest analysis for Silicon Motion Technology
Dividend Volatility
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2015, the dividend has gone from $0.60 total annually to $2.00. This implies that the company grew its distributions at a yearly rate of about 13% over that duration. Silicon Motion Technology has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.
Silicon Motion Technology Could Grow Its Dividend
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see that Silicon Motion Technology has been growing its earnings per share at 8.0% a year over the past five years. The payout ratio is very much on the higher end, which could mean that the growth rate will slow down in the future, and that could flow through to the dividend as well.
In Summary
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Silicon Motion Technology's payments, as there could be some issues with sustaining them into the future. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. Overall, we don't think this company has the makings of a good income stock.