The board of Volex plc (LON:VLX) has announced that it will be increasing its dividend by 8.3% on the 16th of December to $0.013, up from last year's comparable payment of $0.012. Although the dividend is now higher, the yield is only 1.2%, which is below the industry average.
Our analysis indicates that VLX is potentially overvalued!
Volex's Dividend Is Well Covered By Earnings
While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Prior to this announcement, Volex's earnings easily covered the dividend, but free cash flows were negative. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.
Looking forward, earnings per share is forecast to rise by 42.5% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 15%, which is in the range that makes us comfortable with the sustainability of the dividend.
Dividend Volatility
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2012, the annual payment back then was $0.06, compared to the most recent full-year payment of $0.0387. The dividend has shrunk at around 4.3% a year during that period. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.
The Dividend Looks Likely To Grow
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Volex has seen EPS rising for the last five years, at 40% per annum. Earnings per share is growing at a solid clip, and the payout ratio is low which we think is an ideal combination in a dividend stock as the company can quite easily raise the dividend in the future.
In Summary
In summary, while it's always good to see the dividend being raised, we don't think Volex's payments are rock solid. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. Overall, we don't think this company has the makings of a good income stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come across 2 warning signs for Volex you should be aware of, and 1 of them can't be ignored. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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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.
About AIM:VLX
Volex
Manufactures and sells power and data cables in North America, Europe, and Asia.
Undervalued with proven track record.
