Don't Buy Vesuvius plc (LON:VSVS) For Its Next Dividend Without Doing These Checks

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Vesuvius plc (LON:VSVS) is about to trade ex-dividend in the next three days. Ex-dividend means that investors that purchase the stock on or after the 15th of April will not receive this dividend, which will be paid on the 21st of May.

Vesuvius's next dividend payment will be UK£0.14 per share, on the back of last year when the company paid a total of UK£0.17 to shareholders. Based on the last year's worth of payments, Vesuvius stock has a trailing yield of around 3.1% on the current share price of £5.615. 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 investigate whether Vesuvius can afford its dividend, and if the dividend could grow.

View our latest analysis for Vesuvius

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Vesuvius distributed an unsustainably high 114% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 7.5% of its free cash flow as dividends last year, which is conservatively low.

It's good to see that while Vesuvius'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.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. So we're not too excited that Vesuvius's earnings are down 2.7% a year over the past five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Vesuvius's dividend payments per share have declined at 1.1% per year on average over the past eight years, which is uninspiring.

Final Takeaway

Should investors buy Vesuvius for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 114% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Vesuvius's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think Vesuvius is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Vesuvius as an investment, you'll find it beneficial to know what risks this stock is facing. To help with this, we've discovered 3 warning signs for Vesuvius that you should be aware of before investing in their shares.

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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