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Here's Why We're Wary Of Buying VICOM Ltd's (SGX:V01) For Its Upcoming Dividend

Simply Wall St

VICOM Ltd (SGX:V01) stock is about to trade ex-dividend in 2 days time. This means that investors who purchase shares on or after the 28th of May will not receive the dividend, which will be paid on the 5th of June.

VICOM's next dividend payment will be S$0.24 per share, and in the last 12 months, the company paid a total of S$0.38 per share. Based on the last year's worth of payments, VICOM has a trailing yield of 4.7% on the current stock price of SGD8.1. 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! So we need to investigate whether VICOM can afford its dividend, and if the dividend could grow.

View our latest analysis for VICOM

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. VICOM paid out 120% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. A useful secondary check can be to evaluate whether VICOM generated enough free cash flow to afford its dividend. It paid out 108% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

VICOM does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

As VICOM'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 VICOM paid out over the last 12 months.

SGX:V01 Historical Dividend Yield May 25th 2020

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's not encouraging to see that VICOM's earnings are effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last ten years, VICOM has lifted its dividend by approximately 14% a year on average.

The Bottom Line

Is VICOM an attractive dividend stock, or better left on the shelf? It's been unable to generate earnings growth, yet is paying out an uncomfortably high percentage of both its profits (120%) and cash flow (108%) as dividends. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

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 VICOM. Our analysis shows 1 warning sign for VICOM and you should be aware of it before buying any shares.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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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. 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. Thank you for reading.