It Might Not Be A Great Idea To Buy Vp plc (LON:VP.) For Its Next Dividend
Vp plc (LON:VP.) stock is about to trade ex-dividend in four days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase Vp's shares before the 19th of June in order to be eligible for the dividend, which will be paid on the 6th of August.
The company's next dividend payment will be UK£0.28 per share, on the back of last year when the company paid a total of UK£0.40 to shareholders. Based on the last year's worth of payments, Vp has a trailing yield of 6.4% on the current stock price of UK£6.20. If you buy this business for its dividend, you should have an idea of whether Vp's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year, Vp paid out 108% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out an unsustainably high 218% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Vp intends to continue funding this dividend, or if it could be forced to cut the payment.
As Vp's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
See our latest analysis for Vp
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's not ideal to see Vp's earnings per share have been shrinking at 4.8% a year over the previous five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Vp has lifted its dividend by approximately 11% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Vp is already paying out 108% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
Is Vp an attractive dividend stock, or better left on the shelf? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (108%) and cash flow as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. Bottom line: Vp has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Vp. Be aware that Vp is showing 3 warning signs in our investment analysis, and 2 of those make us uncomfortable...
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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