Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Virtu Financial, Inc. (NASDAQ:VIRT) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 30th of November will not receive the dividend, which will be paid on the 15th of December.
Virtu Financial's next dividend payment will be US$0.24 per share, on the back of last year when the company paid a total of US$0.96 to shareholders. Based on the last year's worth of payments, Virtu Financial stock has a trailing yield of around 4.2% on the current share price of $22.68. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Virtu Financial can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Virtu Financial has a low and conservative payout ratio of just 23% of its income after tax.
When a company paid out less in dividends than it earned in profit, this generally suggests its dividend is affordable. The lower the % of its profit that it pays out, the greater the margin of safety for the dividend if the business enters a downturn.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. 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 discomforted by Virtu Financial's 6.9% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. It looks like the Virtu Financial dividends are largely the same as they were five years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.
The Bottom Line
From a dividend perspective, should investors buy or avoid Virtu Financial? Earnings per share have shrunk noticeably in recent years, although we like that the company has a low payout ratio. This could suggest a cut to the dividend may not be a major risk in the near future. At best we would put it on a watch-list to see if business conditions improve, as it doesn't look like a clear opportunity right now.
So if you want to do more digging on Virtu Financial, you'll find it worthwhile knowing the risks that this stock faces. Our analysis shows 3 warning signs for Virtu Financial that we strongly recommend you have a look at before investing in the company.
If you're in the market for dividend stocks, we recommend checking our list of top 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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