Three Things You Should Check Before Buying Vogiatzoglou Systems S.A. (ATH:VOSYS) For Its Dividend

Today we'll take a closer look at Vogiatzoglou Systems S.A. (ATH:VOSYS) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

In this case, Vogiatzoglou Systems likely looks attractive to investors, given its 5.6% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. There are a few simple ways to reduce the risks of buying Vogiatzoglou Systems for its dividend, and we'll go through these below.

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Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Vogiatzoglou Systems paid out 121% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Vogiatzoglou Systems paid out a conservative 28% of its free cash flow as dividends last year. It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Vogiatzoglou Systems fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Consider getting our latest analysis on Vogiatzoglou Systems' financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Vogiatzoglou Systems has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was €0.2 in 2011, compared to €0.1 last year. The dividend has shrunk at around 8.9% a year during that period. Vogiatzoglou Systems' dividend has been cut sharply at least once, so it hasn't fallen by 8.9% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying Vogiatzoglou Systems for its dividend, given that payments have shrunk over the past 10 years.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Over the past five years, it looks as though Vogiatzoglou Systems' EPS have declined at around 13% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Vogiatzoglou Systems' earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Vogiatzoglou Systems' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with its high payout ratio, although at least the dividend was covered by free cash flow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. With this information in mind, we think Vogiatzoglou Systems may not be an ideal dividend stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 3 warning signs for Vogiatzoglou Systems that investors need to be conscious of moving forward.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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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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