Don't Race Out To Buy Vtech Holdings Limited (HKG:303) Just Because It's Going Ex-Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Vtech Holdings Limited (HKG:303) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 1st of December to receive the dividend, which will be paid on the 14th of December.

Vtech Holdings's next dividend payment will be US$0.17 per share. Last year, in total, the company distributed US$0.53 to shareholders. Based on the last year's worth of payments, Vtech Holdings stock has a trailing yield of around 6.7% on the current share price of HK$61.4. If you buy this business for its dividend, you should have an idea of whether Vtech Holdings's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Vtech Holdings

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. Vtech Holdings paid out more than half (68%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Vtech Holdings generated enough free cash flow to afford its dividend. Over the last year, it paid out more than three-quarters (83%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

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. With that in mind, we're not enthused to see that Vtech Holdings's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Vtech Holdings has seen its dividend decline 3.8% per annum on average over the past 10 years, which is not great to see.

To Sum It Up

Is Vtech Holdings an attractive dividend stock, or better left on the shelf? While earnings per share are flat, at least Vtech Holdings has not committed itself to an unsustainable dividend, with its earnings and cashflow payout ratios within reasonable bounds. Bottom line: Vtech Holdings has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Vtech Holdings. Our analysis shows 2 warning signs for Vtech Holdings and you should be aware of these before buying any shares.

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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