It looks like Zotefoams plc (LON:ZTF) is about to go ex-dividend in the next 3 days. You can purchase shares before the 12th of September in order to receive the dividend, which the company will pay on the 10th of October.
Zotefoams’s next dividend payment will be UK£0.02 per share. Last year, in total, the company distributed UK£0.061 to shareholders. Based on the last year’s worth of payments, Zotefoams stock has a trailing yield of around 1.1% on the current share price of £5.4. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Zotefoams paid out a comfortable 36% of its profit last year. 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. Zotefoams paid a dividend despite reporting negative free cash flow last year. That’s typically a bad combination and – if this were more than a one-off – not sustainable.
It’s positive to see that Zotefoams’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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we’re glad to see Zotefoams’s earnings per share have risen 17% 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. Since the start of our data, ten years ago, Zotefoams has lifted its dividend by approximately 3.1% a year on average. It’s good to see both earnings and the dividend have improved – although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
To Sum It Up
Should investors buy Zotefoams for the upcoming dividend? We’re glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it’s not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. Overall, it’s hard to get excited about Zotefoams from a dividend perspective.
Curious what other investors think of Zotefoams? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.