Consider this before buying Keyware Technologies NV (EBR:KEYW) for the 4.5% dividend

Is Keyware Technologies NV (EBR:KEYW) a good dividend stock? How can we know? Companies that pay dividends and grow earnings can be very rewarding in the long run. If you hope to live off dividend income, it’s important to be much more disciplined with your investments than the average punter.

Keyware Technologies yields a solid 4.5%, although it has only been paying for three years. A 4.5% yield looks good. Could the short payment history hint at future dividend growth? When buying stocks for their dividends, you should always do the checks below to see if the dividend looks sustainable.

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Payout rate

Dividends are usually paid from company profits. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Comparing dividend payments to a company’s net profit after tax is a simple way to check whether a dividend is sustainable. Keyware Technologies paid out 99% of its profit as dividends over the last twelve months. With such a high payout ratio, we’d say its dividend is not well covered by earnings. That can be a good thing if earnings are growing, but it might not take much of a downturn for the dividend to come under pressure.

Another important check we perform is to see if the free cash flow generated is sufficient to pay the dividend. With a cash payout ratio of 211%, Keyware Technologies’ dividend payments are poorly covered by cash flow. Paying out more than 100% of your free cash flow as dividends is generally not a sustainable situation in the long term. So we think shareholders should watch this metric closely. Cash is slightly more important than earnings from a dividend perspective, but given that Keyware Technologies’ distributions were not well covered by earnings or cash flow, we would certainly be concerned about the sustainability of this dividend .

We update our data on Keyware Technologies every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income is the possibility of a company experiencing financial difficulties and reducing its dividends. Not only does your income decrease, but the value of your investment also decreases – which is unpleasant. It has only been paying dividends for a few years, and they have already been cut at least once. This is a source of income that we are not prepared to live with. Its most recent annual dividend was €0.04 per share, effectively stable when it was first paid three years ago.

It’s good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway. We’re not very excited about this.

Dividend Growth Potential

Since the dividend has been cut in the past, we need to check if earnings are growing and if this could lead to higher dividends in the future. It’s not encouraging to see that Keyware Technologies’ shares have fallen about 4.9% over the past five years. If profits continue to decline, the dividend could come under pressure. Each investor must evaluate whether the company is taking steps to stabilize the situation.

We should also note that Keyware Technologies issued a significant number of new shares over the past year. Regularly issuing new shares can be detrimental: it is difficult to increase dividends per share when new shares are regularly created.

Conclusion

In summary, shareholders should always check that Keyware Technologies’s dividends are affordable, that its dividend payments are relatively stable, and that it has good prospects for growing its earnings and dividend. We’re a little uncomfortable with the fact that Keyware Technologies is paying out a high percentage of its cash flow and profits. Second, earnings per share have declined and the dividend has been cut at least once in the past. In this analysis, Keyware Technologies doesn’t fare very well as a dividend stock. We’d be hard-pressed to ignore these flaws and wouldn’t be inclined to view it as a reliable dividend payer.

Now if you want to take a closer look, it’s worth checking out our free research on Keyware technologies management mandatesalary and performance.

Looking for more high-yielding dividend ideas? Try our list of dividend stocks yielding over 3%.

If you spot an error that merits correction, please contact the editor at [email protected]. This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or your financial situation. Simply Wall St has no position in any stocks mentioned.

Our goal is to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Thanks for the reading.