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Why You Should Leave Vecima Networks Inc.'s (TSE:VCM) Upcoming Dividend On The Shelf

Simply Wall St

Vecima Networks Inc. (TSE:VCM) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 21st of May to receive the dividend, which will be paid on the 15th of June.

Vecima Networks's next dividend payment will be CA$0.055 per share. Last year, in total, the company distributed CA$0.22 to shareholders. Last year's total dividend payments show that Vecima Networks has a trailing yield of 2.0% on the current share price of CA$10.85. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Vecima Networks

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Vecima Networks lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If Vecima Networks didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. It paid out more than half (65%) of its free cash flow in the past year, which is within an average range for most companies.

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

TSX:VCM Historical Dividend Yield May 16th 2020

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Vecima Networks reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last six years, Vecima Networks has lifted its dividend by approximately 3.4% a year on average.

Remember, you can always get a snapshot of Vecima Networks's financial health, by checking our visualisation of its financial health, here.

Final Takeaway

Has Vecima Networks got what it takes to maintain its dividend payments? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. It's not that we think Vecima Networks is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Vecima Networks and want to know more, you'll find it very useful to know what risks this stock faces. For example, Vecima Networks has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.

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.