Stock Analysis
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Consider This Before Buying VSE Corporation (NASDAQ:VSEC) For The 0.9% Dividend
Could VSE Corporation (NASDAQ:VSEC) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
A 0.9% yield is nothing to get excited about, but investors probably think the long payment history suggests VSE has some staying power. Remember though, due to the recent spike in its share price, VSE's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. Some simple research can reduce the risk of buying VSE for its dividend - read on to learn more.
Explore this interactive chart for our latest analysis on VSE!
Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. While VSE pays a dividend, it reported a loss over the last year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.
VSE's cash payout ratio last year was 13%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout.
We update our data on VSE every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. VSE has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was US$0.1 in 2011, compared to US$0.4 last year. This works out to be a compound annual growth rate (CAGR) of approximately 14% a year over that time. The dividends haven't grown at precisely 14% every year, but this is a useful way to average out the historical rate of growth.
So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? In the last five years, VSE's earnings per share have shrunk at approximately 2.8% per annum. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.
Conclusion
To summarise, shareholders should always check that VSE's 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 the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Earnings per share are down, and VSE's dividend has been cut at least once in the past, which is disappointing. In summary, VSE has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, VSE has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
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What are the risks and opportunities for VSE?
VSE Corporation operates as a diversified aftermarket products and services company in the United States.
Rewards
Trading at 85.4% below our estimate of its fair value
Earnings are forecast to grow 17.24% per year
Earnings grew by 278.1% over the past year
Risks
Debt is not well covered by operating cash flow
Significant insider selling over the past 3 months
Further research on
VSE
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
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About NasdaqGS:VSEC
VSE
VSE Corporation operates as a diversified aftermarket products and services company in the United States.
Proven track record and fair value.
