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Why It Might Not Make Sense To Buy Devro plc (LON:DVO) For Its Upcoming Dividend

Simply Wall St

Readers hoping to buy Devro plc (LON:DVO) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 26th of March to receive the dividend, which will be paid on the 7th of May.

Devro's next dividend payment will be UK£0.063 per share, on the back of last year when the company paid a total of UK£0.09 to shareholders. Calculating the last year's worth of payments shows that Devro has a trailing yield of 6.8% on the current share price of £1.314. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Devro

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. Devro paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Fortunately, it paid out only 48% of its free cash flow in the past year.

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

LSE:DVO Historical Dividend Yield, March 21st 2020

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Devro 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 ten years, Devro has lifted its dividend by approximately 6.1% a year on average.

We update our analysis on Devro every 24 hours, so you can always get the latest insights on its financial health, here.

The Bottom Line

Has Devro got what it takes to maintain its dividend payments? It's hard to get used to Devro paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that being said, if you're still considering Devro as an investment, you'll find it beneficial to know what risks this stock is facing. For instance, we've identified 3 warning signs for Devro (1 can't be ignored) you should be aware of.

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.