Readers hoping to buy Vesuvius plc (LON:VSVS) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 8th of August to receive the dividend, which will be paid on the 20th of September.
Vesuvius’s next dividend payment will be UK£0.062 per share, and in the last 12 months, the company paid a total of UK£0.20 per share. Last year’s total dividend payments show that Vesuvius has a trailing yield of 4.0% on the current share price of £4.91. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it’s growing.
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. Fortunately Vesuvius’s payout ratio is modest, at just 43% of profit. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out more than half (53%) of its free cash flow in the past year, which is within an average range for most companies.
It’s positive to see that Vesuvius’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it’s a relief to see Vesuvius earnings per share are up 3.9% per annum over the last five years. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company’s prospects for future growth.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the past 6 years, Vesuvius has increased its dividend at approximately 2.6% a year on average. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
To Sum It Up
Is Vesuvius an attractive dividend stock, or better left on the shelf? Earnings per share growth has been modest, and it’s interesting that Vesuvius is paying out less than half of its earnings and more than half its cash flow to shareholders in the form of dividends. While it does have some good things going for it, we’re a bit ambivalent and it would take more to convince us of Vesuvius’s dividend merits.
Wondering what the future holds for Vesuvius? See what the 12 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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