Yahoo Finance It Might Not Be A Great Idea To Buy Vector Group Ltd. (NYSE:VGR) For Its Next Dividend
Readers hoping to buy Vector Group Ltd. (NYSE:VGR) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Ex-dividend means that investors that purchase the stock on or after the 18th of March will not receive this dividend, which will be paid on the 30th of March.
Vector Group's upcoming dividend is US$0.20 a share, following on from the last 12 months, when the company distributed a total of US$1.60 per share to shareholders. Looking at the last 12 months of distributions, Vector Group has a trailing yield of approximately 7.3% on its current stock price of $10.97. If you buy this business for its dividend, you should have an idea of whether Vector Group's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
View our latest analysis for Vector Group
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. Vector Group paid out a disturbingly high 241% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. 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 last year, it paid out dividends equivalent to 214% of what it generated in free cash flow, a disturbingly high percentage. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.
As Vector Group'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.
Click here to see how much of its profit Vector Group paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Fortunately for readers, Vector Group's earnings per share have been growing at 19% a year for the past five years. It's great to see earnings per share growing rapidly, but we're disturbed to see the company paid out 241% of its earnings last year. Unless there are extenuating circumstances, we feel this is a clear concern around the sustainability of the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Vector Group has seen its dividend decline 1.6% per annum on average over the past ten years, which is not great to see.
The Bottom Line
Should investors buy Vector Group for the upcoming dividend? 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. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
Although, if you're still interested in Vector Group and want to know more, you'll find it very useful to know what risks this stock faces. For instance, we've identified 4 warning signs for Vector Group (2 can't be ignored) you should be aware of.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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