Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Vector Group Ltd. (NYSE:VGR) is about to go ex-dividend in just four days. This means that investors who purchase shares on or after the 16th of September will not receive the dividend, which will be paid on the 29th of September.
Vector Group’s upcoming dividend is US$0.20 a share, following on from the last 12 months, when the company distributed a total of US$0.80 per share to shareholders. Based on the last year’s worth of payments, Vector Group has a trailing yield of 7.8% on the current stock price of $10.31. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it’s growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year, Vector Group paid out 270% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. A useful secondary check can be to evaluate whether Vector Group generated enough free cash flow to afford its dividend. It paid out more than half (52%) of its free cash flow in the past year, which is within an average range for most companies.
It’s good to see that while Vector Group’s dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we’d view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
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 fall far enough, the company could be forced to cut its dividend. This is why it’s a relief to see Vector Group earnings per share are up 9.9% per annum over the last five years.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Vector Group’s dividend payments per share have declined at 1.5% per year on average over the past 10 years, which is uninspiring.
To Sum It Up
Has Vector Group got what it takes to maintain its dividend payments? While earnings per share have been growing slowly, Vector Group is paying out an uncomfortably high percentage of its earnings. However it did pay out a lower percentage of its cashflow. It’s not the most attractive proposition from a dividend perspective, and we’d probably give this one a miss for now.
With that being said, if you’re still considering Vector Group as an investment, you’ll find it beneficial to know what risks this stock is facing. Our analysis shows 5 warning signs for Vector Group that we strongly recommend you have a look at before investing in the company.
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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This article by Simply Wall St is general in nature. 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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