Today we’ll take a closer look at Vranken-Pommery Monopole – Société Anonyme (EPA:VRAP) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
With a nine-year payment history and a 3.4% yield, many investors probably find Vranken-Pommery Monopole – Société Anonyme intriguing. We’d agree the yield does look enticing. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
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Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. In the last year, Vranken-Pommery Monopole – Société Anonyme paid out 214% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Last year, Vranken-Pommery Monopole – Société Anonyme paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable. It’s disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Vranken-Pommery Monopole – Société Anonyme fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we’d be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Is Vranken-Pommery Monopole – Société Anonyme’s Balance Sheet Risky?
As Vranken-Pommery Monopole – Société Anonyme’s dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A quick way to check a company’s financial situation uses these two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA is a measure of a company’s total debt. Net interest cover measures the ability to meet interest payments on debt. Essentially we check that a) a company does not have too much debt, and b) that it can afford to pay the interest. With a net debt to EBITDA ratio of more than 10x, Vranken-Pommery Monopole – Société Anonyme is very highly levered. While this debt might be serviceable, we would still say it carries substantial risk for the investor who hopes to live on the dividend.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. With EBIT of 1.35 times its interest expense, Vranken-Pommery Monopole – Société Anonyme’s interest cover is starting to look a bit thin. Low interest cover and high debt can create problems right when the investor least needs them. We’re generally reluctant to rely on the dividend of companies with these traits.
Remember, you can always get a snapshot of Vranken-Pommery Monopole – Société Anonyme’s latest financial position, by checking our visualisation of its financial health.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. Looking at the last decade of data, we can see that Vranken-Pommery Monopole – Société Anonyme paid its first dividend at least nine years ago. It’s good to see that Vranken-Pommery Monopole – Société Anonyme has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we’re concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was €1.15 in 2010, compared to €0.80 last year. This works out to be a decline of approximately 4.0% per year over that time. Vranken-Pommery Monopole – Société Anonyme’s dividend has been cut sharply at least once, so it hasn’t fallen by -4.0% every year, but this is a decent approximation of the long term change.
Dividend Growth Potential
With a relatively unstable dividend, it’s even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there’s a good chance of bigger dividends in future? It’s not great to see that Vranken-Pommery Monopole – Société Anonyme’s have fallen at approximately 16% over the past five years. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.
To summarise, shareholders should always check that Vranken-Pommery Monopole – Société Anonyme’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It’s a concern to see that the company paid out such a high percentage of its earnings and cashflow as dividends. Earnings per share are down, and Vranken-Pommery Monopole – Société Anonyme’s dividend has been cut at least once in the past, which is disappointing. Using these criteria, Vranken-Pommery Monopole – Société Anonyme looks quite suboptimal from a dividend investment perspective.
Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from costs or inflation. Businesses can change though, and we think it would make sense to see what analysts are forecasting for the company.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.