Analog Devices, Inc. (NASDAQ:ADI) passed our tests and is set to pay a dividend of $0.76

Readers hoping to buy Analog Devices, Inc. (NASDAQ:ADI) for its dividend will have to come shortly, as the stock is set to trade ex-dividend. The ex-dividend date occurs one day before the record date which is the day shareholders must be on the books of the company to receive a dividend. The ex-dividend date is an important date to know because any purchase of shares made on or after this date may mean late settlement that does not appear on the record date. As a result, Analog Devices investors who buy the stock on or after December 2 will not receive the dividend, which will be paid on December 15.

The company’s next dividend payout will be $0.76 per share, following last year when the company paid a total of $3.04 to shareholders. Based on last year’s payouts, Analog Devices has a 1.8% return on the current stock price of $167.09. Dividends are an important source of income for many shareholders, but the health of the company is essential to sustaining those dividends. We need to see if the dividend is covered by earnings and if it increases.

Our analysis indicates that ADI is potentially undervalued!

Dividends are usually paid out of company profits. If a company pays out more dividends than it earns in profits, then the dividend could be unsustainable. Analog Devices pays out an acceptable 57% of its profits, a common payout level for most companies. Still, cash flow is even more important than earnings in evaluating a dividend, so we need to see if the company has generated enough cash to pay its distribution. Fortunately, it only paid out 41% of its free cash flow over the past year.

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?

Stocks of companies that generate sustainable earnings growth often offer the best dividend prospects because it is easier to increase the dividend when earnings increase. If earnings fall and the company is forced to cut its dividend, investors could see the value of their investment go up in smoke. Luckily for readers, Analog Devices’ earnings per share have grown 18% annually for the past five years. Analog Devices pays out just over half of its earnings, suggesting the company is finding a balance between reinvesting in growth and paying dividends. This is a reasonable combination that could portend further dividend increases in the future.

Many investors will gauge a company’s dividend yield by evaluating how much dividend payouts have changed over time. Over the past 10 years, Analog Devices has increased its dividend by about 9.7% per year on average. It’s encouraging to see the company increasing its dividends as earnings rise, suggesting at least some corporate interest in rewarding shareholders.

The essential

Is Analog Devices an attractive dividend stock, or is it better left on the shelf? Analog Devices’ growing earnings per share and conservative payout ratios are a decent combination. We also like that it paid out a lower percentage of its cash flow. There’s a lot to like about Analog Devices, and we’d prioritize a closer look.

Want to know what other investors think of Analog Devices? See analyst forecasts with this visualization of its historical and future estimated earnings and cash flow.

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.