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

Vtech Holdings Limited (HKG:303) stock is about to trade ex-dividend in 3 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase Vtech Holdings' shares before the 5th of December in order to be eligible for the dividend, which will be paid on the 18th of December.

The company's next dividend payment will be US$0.17 per share. Last year, in total, the company distributed US$0.65 to shareholders. Calculating the last year's worth of payments shows that Vtech Holdings has a trailing yield of 9.5% on the current share price of HK$53.15. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Vtech Holdings has been able to grow its dividends, or if the dividend might be cut.

View 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. Last year Vtech Holdings paid out 102% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Vtech Holdings generated enough free cash flow to afford its dividend. Fortunately, it paid out only 46% of its free cash flow in the past 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 Vtech Holdings fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Vtech Holdings 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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's not encouraging to see that Vtech Holdings's earnings are effectively flat 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.

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 2.1% per annum on average over the past 10 years, which is not great to see.

Final Takeaway

From a dividend perspective, should investors buy or avoid Vtech Holdings? Along with flat earnings per share, Vtech Holdings paid out an uncomfortably high percentage of its earnings. It paid out a lower percentage of its free cash flow. It's not that we think Vtech Holdings is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Vtech Holdings and want to know more, you'll find it very useful to know what risks this stock faces. Be aware that Vtech Holdings is showing 2 warning signs in our investment analysis, and 1 of those is significant...

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.