Zotefoams plc (LON:ZTF) is about to trade ex-dividend in the next four days. This means that investors who purchase shares on or after the 10th of September will not receive the dividend, which will be paid on the 9th of October.
Zotefoams's upcoming dividend is UK£0.02 a share, following on from the last 12 months, when the company distributed a total of UK£0.041 per share to shareholders. Looking at the last 12 months of distributions, Zotefoams has a trailing yield of approximately 1.0% on its current stock price of £4.1. If you buy this business for its dividend, you should have an idea of whether Zotefoams's dividend is reliable and sustainable. So we need to investigate whether Zotefoams can afford its dividend, and if the dividend could grow.
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. Zotefoams paid out just 16% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Zotefoams paid a dividend despite reporting negative free cash flow last year. That's typically a bad combination and - if this were more than a one-off - not sustainable.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Zotefoams earnings per share are up 9.7% per annum over the last five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Zotefoams has seen its dividend decline 1.0% per annum on average over the past 10 years, which is not great to see.
To Sum It Up
Is Zotefoams worth buying for its dividend? Zotefoams has seen its earnings per share grow steadily and paid out less than half its profit over the last year. Unfortunately, its dividend was not well covered by free cash flow. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
If you're not too concerned about Zotefoams's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. For example, we've found 3 warning signs for Zotefoams that we recommend you consider before investing in the business.
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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