Yahoo Finance Don't Race Out To Buy Victrex plc (LON:VCT) Just Because It's Going Ex-Dividend
It looks like Victrex plc (LON:VCT) is about to go ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, Victrex investors that purchase the stock on or after the 19th of January will not receive the dividend, which will be paid on the 17th of February.
The company's next dividend payment will be UK£0.46 per share. Last year, in total, the company distributed UK£0.60 to shareholders. Based on the last year's worth of payments, Victrex has a trailing yield of 3.4% on the current stock price of £17.32. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
See our latest analysis for Victrex
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. Victrex is paying out an acceptable 68% of its profit, a common payout level among most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out an unsustainably high 276% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Victrex intends to continue funding this dividend, or if it could be forced to cut the payment.
Victrex paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Victrex to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Victrex's earnings per share have dropped 5.5% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Victrex has lifted its dividend by approximately 4.8% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.
To Sum It Up
Is Victrex worth buying for its dividend? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. Bottom line: Victrex has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
With that in mind though, if the poor dividend characteristics of Victrex don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 1 warning sign for Victrex you should know about.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
