Here's Why We're Wary Of Buying LifeVantage's (NASDAQ:LFVN) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that LifeVantage Corporation (NASDAQ:LFVN) is about to go ex-dividend in just two 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 LifeVantage's shares before the 9th of September in order to receive the dividend, which the company will pay on the 17th of September.

The company's next dividend payment will be US$0.04 per share. Last year, in total, the company distributed US$0.16 to shareholders. Based on the last year's worth of payments, LifeVantage stock has a trailing yield of around 1.8% on the current share price of US$9.00. 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 check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for LifeVantage

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. LifeVantage paid out 62% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether LifeVantage generated enough free cash flow to afford its dividend. Over the last year it paid out 70% of its free cash flow as dividends, within the usual range for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see how much of its profit LifeVantage paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by LifeVantage's 15% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last two years, LifeVantage has lifted its dividend by approximately 15% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

To Sum It Up

Is LifeVantage an attractive dividend stock, or better left on the shelf? While earnings per share are shrinking, it's encouraging to see that at least LifeVantage's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. Bottom line: LifeVantage has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering LifeVantage as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 3 warning signs for LifeVantage (1 can't be ignored!) that deserve your attention before investing in the shares.

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.