Victrex plc (LON:VCT) has announced that it will pay a dividend of UK£0.13 per share on the 29th of June. This means the annual payment is 6.6% of the current stock price, which is above the average for the industry.
Victrex Doesn't Earn Enough To Cover Its Payments
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, Victrex was paying out quite a large proportion of both earnings and cash flow, with the dividend being 107% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.
Earnings per share is forecast to rise by 22.0% over the next year. If the dividend continues on its recent course, the payout ratio in 12 months could be 115%, which is a bit high and could start applying pressure to the balance sheet.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The first annual payment during the last 10 years was UK£0.33 in 2012, and the most recent fiscal year payment was UK£0.60. This implies that the company grew its distributions at a yearly rate of about 6.2% over that duration. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.
Dividend Growth May Be Hard To Achieve
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. In the last five years, Victrex's earnings per share has shrunk at approximately 3.7% per annum. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.
The Dividend Could Prove To Be Unreliable
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. This company is not in the top tier of income providing stocks.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 2 warning signs for Victrex that investors should know about before committing capital to this stock. Is Victrex not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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