U.S. markets open in 1 hour 29 minutes

Dividend Investors: Don't Be Too Quick To Buy Viva Energy Group Limited (ASX:VEA) For Its Upcoming Dividend

Simply Wall St

Readers hoping to buy Viva Energy Group Limited (ASX:VEA) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 24th of March in order to receive the dividend, which the company will pay on the 15th of April.

Viva Energy Group's next dividend payment will be AU$0.026 per share, on the back of last year when the company paid a total of AU$0.052 to shareholders. Based on the last year's worth of payments, Viva Energy Group has a trailing yield of 4.2% on the current stock price of A$1.25. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Viva Energy Group can afford its dividend, and if the dividend could grow.

See our latest analysis for Viva Energy Group

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Its dividend payout ratio is 81% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be concerned if earnings began to decline. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the past year it paid out 129% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

While Viva Energy Group's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Viva Energy Group's ability to maintain its dividend.

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

ASX:VEA Historical Dividend Yield, March 19th 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Viva Energy Group's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 66% a year over the past five years.

Unfortunately Viva Energy Group has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.

The Bottom Line

From a dividend perspective, should investors buy or avoid Viva Energy Group? 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. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Viva Energy Group.

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 Viva Energy Group. For example, we've found 3 warning signs for Viva Energy Group that we recommend you consider before investing in the business.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.