Don't Buy Bioventix PLC (LON:BVXP) For Its Next Dividend Without Doing These Checks

Bioventix PLC (LON:BVXP) is about to trade ex-dividend in the next three days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. In other words, investors can purchase Bioventix's shares before the 6th of November in order to be eligible for the dividend, which will be paid on the 21st of November.

The company's next dividend payment will be UK£0.80 per share, and in the last 12 months, the company paid a total of UK£1.50 per share. Based on the last year's worth of payments, Bioventix stock has a trailing yield of around 7.3% on the current share price of UK£20.50. 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 Bioventix can afford its dividend, and if the dividend could grow.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Bioventix paid out 103% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. Over the past year it paid out 117% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cash is slightly more important than profit from a dividend perspective, but given Bioventix's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

See our latest analysis for Bioventix

Click here to see how much of its profit Bioventix paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about Bioventix's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. With limited earnings growth and paying out a concerningly high percentage of its earnings, the prospects of future dividend growth don't look so bright here.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Bioventix has delivered 16% dividend growth per year on average over the past 10 years.

To Sum It Up

Is Bioventix an attractive dividend stock, or better left on the shelf? Bioventix is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, at the same time as its earnings per share are struggling to grow. It's not that we think Bioventix is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in Bioventix despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Case in point: We've spotted 1 warning sign for Bioventix you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.