Dividend Investors: Don't Be Too Quick To Buy Vestis Corporation (NYSE:VSTS) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Vestis Corporation (NYSE:VSTS) is about to trade ex-dividend in the next 2 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. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase Vestis' shares before the 21st of February in order to receive the dividend, which the company will pay on the 18th of March.

The company's upcoming dividend is US$0.035 a share, following on from the last 12 months, when the company distributed a total of US$0.14 per share to shareholders. Looking at the last 12 months of distributions, Vestis has a trailing yield of approximately 1.0% on its current stock price of US$13.69. If you buy this business for its dividend, you should have an idea of whether Vestis's dividend is reliable and sustainable. As a result, readers should always check whether Vestis has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Vestis

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Vestis distributed an unsustainably high 193% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. It paid out 6.0% of its free cash flow as dividends last year, which is conservatively low.

It's good to see that while Vestis's dividends were not covered by profits, at least they are affordable from a cash perspective. 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 the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. From this perspective, we're disturbed to see earnings per share plunged 95% over the last 12 months, and we'd wonder if the company has had some kind of major event that has skewed the calculation.

Unfortunately Vestis has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.

The Bottom Line

Is Vestis an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 193% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Vestis's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that in mind though, if the poor dividend characteristics of Vestis don't faze you, it's worth being mindful of the risks involved with this business. Be aware that Vestis is showing 3 warning signs in our investment analysis, and 1 of those is concerning...

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.