Last update on 2024-06-27

Microchip Technology (MCHP) - Dividend Analysis (Final Score: 4/8)

Deep dive dividend analysis of Microchip Technology (MCHP) using an 8-criteria system. Final Score: 4/8. Assessing dividend stability, growth, payout ratio, and more.

Short Analysis - Dividend Score: 4

We're running Microchip Technology (MCHP) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

Microchip Technology (MCHP) underwent an 8-criteria dividend analysis, earning a score of 4. The company boasts a dividend yield of 1.7631%, surpassing the industry average of 0.65%. Over the last 20 years, its dividend growth rate and stability have been strong, with dividends paid consistently and growing. Key concerns include a high payout ratio averaging 177.42% over 20 years, suggesting dividends often exceed earnings, and dividends are not always well covered by cash flow, evidenced by a declining coverage ratio since 2009. The company's dividends reflect financial robustness during several periods but recent trends highlight potential sustainability issues. Further analysis shows reliable dividends have been paid for over 25 years, but the dividend coverage by earnings and cash flow is questionable.

Insights for Value Investors Seeking Stable Income

Microchip Technology (MCHP) demonstrates a solid dividend performance relative to its industry, making it potentially appealing to income-focused investors due to its high yield and stability over 20 years. However, the high payout ratio and declining cash flow coverage indicate potential risks in the sustainability of these dividends. Therefore, while MCHP shows promise, it's crucial to undertake a more comprehensive analysis of financials and future earnings potential before investing. Proceed with caution and consider diversifying your investments to mitigate risks.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield is important as it represents the dividend income relative to the stock price.

Microchip Technology (MCHP) has a current dividend yield of 1.7631%, notably higher than the industry average of 0.65%. Over the last 20 years, MCHP's dividend yield has consistently outperformed the industry, peaking at 6.7947% in 2008. Despite fluctuations, the trend suggests a strong commitment to returning value to shareholders, especially when the stock price closed at $90.18 in 2023. This high dividend yield is a positive indicator for income-focused investors.

Average annual Growth Rate higher than 5% in the last 20 years?

Explain the criterion for Microchip Technology (MCHP) and why it is important to consider

The dividend growth rate is a key indicator of a company's financial health and its ability to return value to shareholders. Over a 20-year period, it can reflect the company's long-term stability and growth potential. For Microchip Technology (MCHP), this means assessing if the compound annual growth rate (CAGR) of dividends per share exceeds 5%, which indicates strong, sustainable growth.

Average annual Payout Ratio lower than 65% in the last 20 years?

The payout ratio is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage.

The average payout ratio for Microchip Technology over the last 20 years is 177.42%, significantly exceeding the threshold of 65%. Consistently high payout ratios above 100%, such as those observed from 2005 to 2022, suggest that the company has been paying out more in dividends than it earns, which is concerning. This indicates potential unsustainable dividend payments, reliance on external financing, or the use of retained earnings to cover dividends—generally a bad trend for long-term dividend stability and company health.

Dividends Well Covered by Earnings?

Dividends are well covered by the earnings means that the company's earnings per share (EPS) exceed the dividends per share. It ensures the company is generating enough profit to sustain its dividend payments.

Over the years, Microchip Technology's coverage ratio has fluctuated. In the early 2000s, the company exhibited a lower ratio, with EPS barely covering dividends. However, from 2011 to 2018, the company's earnings substantially covered the dividends, sometimes by more than two to three times, demonstrating financial robustness. Notably in 2022, the coverage dipped to 0.497, suggesting that dividends were higher than the earnings, which is not a good sign for dividend sustainability. Generally, a consistent trend of earnings covering dividends is indicative of a financially healthy company.

Dividends Well Covered by Cash Flow?

Dividends Well Covered by Cash Flow is an important criterion as it indicates the ability of Microchip Technology to not only sustain but potentially grow its dividend payments over time without compromising its financial stability. A ratio below 1 indicates that dividends are not well covered by free cash flow.

Microchip Technology's ratio of Dividends Covered by Cash Flow started strong in the early 2000s and peaked impressively in 2009 at 1.1957. However, from 2010 onwards, there’s a clear trend of declining coverage, reaching as low as 0.2038 in 2022. This ratio hovered below the critical mark of 1 after 2009, which is concerning. For instance, in 2023, the Dividend Covered by Cash Flow ratio stands at 0.2218, indicating the company is using more than its free cash flow to pay dividends. This trend of declining coverage is bad for the given criterion, highlighting potential sustainability issues in maintaining or increasing dividend payouts without relying on external financing or cash reserves.

Stable Dividends Since the Company Began Paying Dividends?

Stable Dividends Over the Past 20 Years is crucial as it indicates the reliability of the company in providing consistent income to investors. It is a key factor for income-seeking investors who depend on a steady and predictable dividend stream from their investments.

Upon examining Microchip Technology's dividend payment history for the last 20 years, the company shows remarkable stability. The data reflects only minor fluctuations, with dividends per share generally increasing over time. Apart from 2021 where there was a marginal drop, no year sees a reduction of more than 20%. Thus, on stability, Microchip Technology fares well, making it an appealing option for income investors.

Dividends Paid for Over 25 Years?

Explain the criterion for Microchip Technology (MCHP) and why it is important to consider

A company's ability to pay dividends for over 25 years is often seen as a sign of financial stability and strong cash flow. For Microchip Technology, you should check if they have consistently paid dividends over this period and whether the trend in their dividend per share is positive, neutral, or declining.

Reliable Stock Repurchases Over the Past 20 Years?

Explain the criterion for Microchip Technology (MCHP) and why it is important to consider

The analysis of stock repurchases over a period as long as 20 years provides critical insight into the company's capital allocation strategy and shareholder value enhancement practices. When a company repurchases its own stock, it reduces the number of outstanding shares, which can increase earnings per share (EPS) and often signals confidence in the company's future prospects. This strategy can be particularly beneficial to shareholders if the stock is repurchased at undervalued prices, thereby providing greater returns on investment.