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Here's Why We're Wary Of Buying Britvic plc's (LON:BVIC) For Its Upcoming Dividend

Simply Wall St

Britvic plc (LON:BVIC) is about to trade ex-dividend in the next 3 days. You can purchase shares before the 5th of December in order to receive the dividend, which the company will pay on the 5th of February.

Britvic's next dividend payment will be UK£0.22 per share, and in the last 12 months, the company paid a total of UK£0.30 per share. Calculating the last year's worth of payments shows that Britvic has a trailing yield of 3.1% on the current share price of £9.69. 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 Britvic can afford its dividend, and if the dividend could grow.

See our latest analysis for Britvic

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. Last year Britvic paid out 98% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. It paid out more than half (69%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while Britvic's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

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

LSE:BVIC Historical Dividend Yield, December 1st 2019

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. That's why it's not ideal to see Britvic's earnings per share have been shrinking at 3.5% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, Britvic has increased its dividend at approximately 7.2% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Britvic is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

The Bottom Line

Is Britvic an attractive dividend stock, or better left on the shelf? It's never fun to see a company's earnings per share in retreat. Additionally, Britvic is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Curious what other investors think of Britvic? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

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.

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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