The perfect dividend stock offers more than just a beefy yield. The company’s board of directors should also show a real commitment to keeping the payouts coming for many years, and it’s even better if the dividends are being financed by a steadily growing stream of free cash flows. Based on those criteria, I’m afraid that income investors should walk away from Gilat Satellite Networks (NASDAQ:GILT).
This maker of satellite communications equipment is no ultra-reliable Dividend Aristocrat. The in-flight connectivity specialist sports a generous dividend yield of 7.8% today, but that’s kind of a mirage.
Gilat’s rocky dividend history
Gilat has issued a grand total of three dividend payments so far and management has no clear-cut plans to distribute more.
The first was a one-time payment of $0.45 per share in April 2019. That worked out to a yield of 5.3% at the share prices of the time. Gilat’s leadership was hoping to continue the practice of sharing surplus cash with stockholders, but you know what they say about the best-laid plans of mice and men. The company’s “ample liquidity” dried up that year, and rival Comtech Communications (NASDAQ:CMTL) announced a $530 million buyout offer for Gilat in early 2020. Even if Gilat had been in a position to distribute any extra cash with its shareholders, it’s not common practice to do so when there’s a takeover in progress. Saving that cash for Comtech was more in the spirit of the proposed merger.
Two more dividend payouts — and that’s all
Let’s get back to the mice and men. Comtech withdrew its buyout offer in early October, at which point it was obligated to send Gilat a $70 million breakup fee. The COVID-19 pandemic shattered the dream of what Gilat Chairman Dov Baharav had called “a perfect marriage,” and the Israel-based company quickly decided to pour the $70 million windfall into some more dividend payments.
A payout of $0.36 per share followed in November. Gilat consumed the last of its breakup fee in a final dividend check of $0.63 per share on Jan. 20. But that’s it. This company has no plans to cook up another dividend check anytime soon.
However, thanks to the eye-popping effective yield of 7.8% those payouts generated, Gilat is now popping up on the radar of income investors. Dig just a little bit deeper and you’ll find that it’s a terrible dividend stock. You could consider buying this stock as a bet on the eventual recoveries of the travel and hospitality sector, where most of Gilat’s major customers are found. That’s a whole different ball of wax. But it could be years before Gilat prints out its next dividend check.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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