It looks like Vital Limited (NZSE:VTL) is about to go ex-dividend in the next 4 days. You can purchase shares before the 3rd of October in order to receive the dividend, which the company will pay on the 18th of October.
Vital's next dividend payment will be NZ$0.04 per share, which looks like a nice increase on last year, when the company distributed a total of NZ$0.03 to shareholders. If you buy this business for its dividend, you should have an idea of whether Vital's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Vital paid out a comfortable 27% of its profit last year. Vital paid a dividend despite reporting negative free cash flow last year. That's typically a bad combination and - if this were more than a one-off - not sustainable.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Vital's earnings have been skyrocketing, up 54% per annum for the past five years.
We'd also point out that Vital issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Vital's dividend payments per share have declined at 17% per year on average over the past ten years, which is uninspiring. Vital is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
Is Vital an attractive dividend stock, or better left on the shelf? When companies are growing rapidly and retaining a majority of the profits within the business, it's usually a sign that reinvesting earnings creates more value than paying dividends to shareholders. This is one of the most attractive investment combinations under this analysis, as it can create substantial value for investors over the long run. We think this is a pretty attractive combination, and would be interested in investigating Vital more closely.
Curious about whether Vital has been able to consistently generate growth? Here's a chart of its historical revenue and earnings growth.
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.
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