Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Valhi, Inc. (NYSE:VHI) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 2nd of December to receive the dividend, which will be paid on the 19th of December.
Valhi's next dividend payment will be US$0.02 per share. Last year, in total, the company distributed US$0.08 to shareholders. Based on the last year's worth of payments, Valhi stock has a trailing yield of around 4.1% on the current share price of $1.93. 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 check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see Valhi paying out a modest 45% of its earnings. 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. It paid out 101% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.
While Valhi'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 Valhi's ability to maintain its dividend.
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 earnings fall far enough, the company could be forced to cut its dividend. It's encouraging to see Valhi has grown its earnings rapidly, up 44% a year for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Valhi's dividend payments per share have declined at 5.0% per year on average over the past ten years, which is uninspiring. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.
Should investors buy Valhi for the upcoming dividend? We like that Valhi has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.
Want to learn more about Valhi's dividend performance? Check out this visualisation of its historical revenue and earnings growth.
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.
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