Should Income Investors Look At Zotefoams plc (LON:ZTF) Before Its Ex-Dividend?

By
Simply Wall St
Published
May 02, 2021
LSE:ZTF

Zotefoams plc (LON:ZTF) stock is about to trade ex-dividend in 3 days. Ex-dividend means that investors that purchase the stock on or after the 6th of May will not receive this dividend, which will be paid on the 1st of June.

Zotefoams's upcoming dividend is UK£0.043 a share, following on from the last 12 months, when the company distributed a total of UK£0.085 per share to shareholders. Based on the last year's worth of payments, Zotefoams has a trailing yield of 2.1% on the current stock price of £4.12. 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! We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Zotefoams

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Fortunately Zotefoams's payout ratio is modest, at just 42% of profit. 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. 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.

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

historic-dividend
LSE:ZTF Historic Dividend May 2nd 2021

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Zotefoams earnings per share are up 6.1% per annum over the last five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Zotefoams has lifted its dividend by approximately 6.3% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

Is Zotefoams an attractive dividend stock, or better left on the shelf? 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. All things considered, we are not particularly enthused about Zotefoams from a dividend perspective.

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 - Zotefoams has 2 warning signs we think you should be aware of.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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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