For investors looking for a dependable source of passive income, a methodical screening process is needed to distinguish solid dividend payers from possible value traps. A typical and useful approach uses filters for companies that provide a good dividend now and also have the fundamental financial capacity to maintain and possibly increase those payments in the future. This usually requires examining more than the stated yield to evaluate earnings, balance sheet condition, and the payout's own longevity. One stock that results from this strict screen is NETAPP INC (NASDAQ:NTAP).
A Firm Base in Earnings
Before a firm can dependably distribute profits to shareholders, it must produce them steadily and effectively. NetApp's basic profile shows a firm with a very solid earnings engine, which is the initial pillar holding up its dividend attraction. The company gets a leading ChartMill Profitability Rating of 9 out of 10, showing better results compared to others in the Technology Hardware, Storage & Peripherals field.
This high rating is supported by a number of important figures:
- High Margins: NetApp has a Gross Margin of 70.26%, doing better than each company in its field. Its Operating Margin of 22.60% and Profit Margin of 17.73% also put it in the leading 10% of field peers.
- Good Returns on Capital: The firm produces a Return on Invested Capital (ROIC) of 19.95%, notably higher than its cost of capital, meaning it is producing real economic value. Its Return on Equity is a notable 119.37%.
- Steady Earnings Record: NetApp has recorded positive earnings and operating cash flow in every one of the last five years, showing a history of financial steadiness.
For a dividend investor, this degree of earnings is vital. It supplies a large cushion, making sure the cash required for dividend payments is easily on hand without endangering the firm's requirement to put money back into its operations or manage an economic slump.
Examining the Dividend Directly
While earnings supply the ability, the dividend's setup and history supply the trust. NetApp gets a good ChartMill Dividend Rating of 7, indicating a balanced dividend profile. A closer inspection of the full fundamental analysis report explains why.
Yield and Increase: The stock provides a dividend yield of 2.09%, which is fair and higher than the field average of 0.66%. While the dividend's yearly growth rate has been low at 1.72% over the past five years, its consistency is a main positive. NetApp has both paid and not reduced its dividend for at least ten years, creating a reliable history for income-oriented investors.
Longevity, The Important Element: This is where NetApp's profile becomes especially interesting for a dividend longevity screen. The most significant figure here is the payout ratio.
- NetApp distributes about 35.51% of its net income as dividends.
- This is seen as a very maintainable level, leaving most earnings to finance operations, growth projects, and share buybacks.
- Also, analyst forecasts show that earnings are expected to increase quicker than the dividend, implying the present payout ratio is not strained and could have space to get better.
A low and steady payout ratio, supported by solid and increasing profits, straightly tackles the central risk in dividend investing: the chance of a reduction. It shows management's dedication to the dividend is measured with careful financial management.
Reviewing Balance Sheet Condition
No dividend is secure if the firm's balance sheet is poor. NetApp's ChartMill Health Rating of 6 indicates a mostly good financial state with some detailed points. The examination shows very good solvency regarding cash flow production; the firm could pay off all its debt with only 1.48 years of free cash flow, a ratio that does better than 85% of its field. Liquidity ratios are also sufficient, showing no immediate payment problems.
The report mentions a somewhat high Debt/Equity ratio, which is normal in the tech industry and can be affected by share repurchase plans. However, the key point for dividend investors is that the firm's large free cash flow sufficiently meets its debt duties and dividend payments, lessening the worry brought up by the leverage ratio. The health rating verifies the firm is not in trouble, which is the basic need for a dependable dividend payer.
Price Consideration
For investors buying shares for income, the price paid is important. NetApp seems to be fairly priced, which backs its addition in a value-aware dividend plan. Its Price/Earnings ratio of 13.77 and Forward P/E of 11.75 are much lower than both the wider S&P 500 average and most of its field peers. When paired with its high earnings, this price suggests the market might not be completely valuing the firm's cash-producing ability and the safety of its shareholder returns.
A Subject for More Study
NetApp Inc. offers an example in how an organized dividend screen can find possible subjects. It fits with a plan that values longevity over pure yield amount, focusing on solid earnings, a workable payout ratio, and sufficient balance sheet condition. The stock gives a fair yield supported by ten years of steady payments, all backed by a business that produces solid margins and cash flow.
This review of NETAPP INC (NASDAQ:NTAP) was prompted by using a "Best Dividend" screen. Investors wishing to find other firms that match similar standards of high dividend ratings along with good earnings and balance sheet condition can review the full screen findings here.
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Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation to buy or sell any security, or an endorsement of any investment strategy. Investors should conduct their own research and consider their individual financial circumstances and risk tolerance before making any investment decisions.
