Here's Why We're Wary Of Buying Vitesse Energy's (NYSE:VTS) For Its Upcoming Dividend

Vitesse Energy, Inc. (NYSE:VTS) is about to trade ex-dividend in the next 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Vitesse Energy's shares on or after the 15th of September, you won't be eligible to receive the dividend, when it is paid on the 30th of September.

The company's next dividend payment will be US$0.5625 per share. Last year, in total, the company distributed US$2.25 to shareholders. Last year's total dividend payments show that Vitesse Energy has a trailing yield of 8.8% on the current share price of US$25.57. If you buy this business for its dividend, you should have an idea of whether Vitesse Energy's dividend is reliable and sustainable. As a result, readers should always check whether Vitesse Energy has been able to grow its dividends, or if the dividend might be cut.

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Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Vitesse Energy distributed an unsustainably high 182% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. Over the past year it paid out 152% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

As Vitesse Energy's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

See our latest analysis for Vitesse Energy

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see Vitesse Energy's earnings have been skyrocketing, up 67% per annum for the past five years. Earnings per share are increasing at a rapid rate, but the company is paying out more than we think is sustainable, based on current earnings. Companies that pay out more than they earned while growing rapidly, can find themselves short of cash in a few years when growth slows.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, three years ago, Vitesse Energy has lifted its dividend by approximately 4.0% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Vitesse Energy is keeping back more of its profits to grow the business.

To Sum It Up

Has Vitesse Energy got what it takes to maintain its dividend payments? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. Bottom line: Vitesse Energy 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 Vitesse Energy. Our analysis shows 4 warning signs for Vitesse Energy that we strongly recommend you have a look at before investing in the company.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.