How Does Communications Systems, Inc. (NASDAQ:JCS) Fare As A Dividend Stock?
Is Communications Systems, Inc. (NASDAQ:JCS) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.
A slim 1.6% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Communications Systems could have potential. The company also bought back stock equivalent to around 1.5% of market capitalisation this year. Some simple analysis can reduce the risk of holding Communications Systems for its dividend, and we’ll focus on the most important aspects below.
Explore this interactive chart for our latest analysis on Communications Systems!
NasdaqGM:JCS Historical Dividend Yield April 17th 2020
Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 296% of Communications Systems’s profits were paid out as dividends in the last 12 months. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Communications Systems’s cash payout ratio last year was 7.6%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It’s good to see that while Communications Systems’s dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we’d view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
While the above analysis focuses on dividends relative to a company’s earnings, we do note Communications Systems’s strong net cash position, which will let it pay larger dividends for a time, should it choose.
We update our data on Communications Systems every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Volatility
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Communications Systems’s dividend payments. The dividend has been cut on at least one occasion historically. During the past ten-year period, the first annual payment was US$0.56 in 2010, compared to US$0.08 last year. Dividend payments have fallen sharply, down 86% over that time.
When a company’s per-share dividend falls we question if this reflects poorly on either external business conditions, or the company’s capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Communications Systems’s EPS have fallen by approximately 35% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.
Conclusion
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We’re not keen on the fact that Communications Systems paid out such a high percentage of its income, although its cashflow is in better shape. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In summary, Communications Systems has a number of shortcomings that we’d find it hard to get past. Things could change, but we think there are a number of better ideas out there.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we’ve picked out 2 warning signs for Communications Systems that investors should know about before committing capital to this stock.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
If you spot an error that warrants correction, please contact the editor at [email protected]. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
