It Might Not Be A Great Idea To Buy Victrex plc (LON:VCT) For Its Next Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Victrex plc (LON:VCT) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 28th of January in order to be eligible for this dividend, which will be paid on the 19th of February.

Victrex's next dividend payment will be UK£0.46 per share. Last year, in total, the company distributed UK£0.46 to shareholders. Based on the last year's worth of payments, Victrex has a trailing yield of 1.9% on the current stock price of £24.2. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Victrex has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Victrex

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Victrex paid out more than half (74%) of its earnings last year, which is a regular payout ratio for most companies. 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. Over the last year, it paid out more than three-quarters (90%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Victrex's earnings per share have fallen at approximately 8.6% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Victrex has increased its dividend at approximately 6.3% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

Final Takeaway

Is Victrex worth buying for its dividend? While earnings per share are shrinking, it's encouraging to see that at least Victrex's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. Bottom line: Victrex has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Victrex. Our analysis shows 2 warning signs for Victrex and you should be aware of them before buying any 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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