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Why It Might Not Make Sense To Buy Vianet Group plc (LON:VNET) For Its Upcoming Dividend

Simply Wall St

Readers hoping to buy Vianet Group plc (LON:VNET) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 19th of December, you won't be eligible to receive this dividend, when it is paid on the 5th of February.

Vianet Group's next dividend payment will be UK£0.017 per share. Last year, in total, the company distributed UK£0.057 to shareholders. Looking at the last 12 months of distributions, Vianet Group has a trailing yield of approximately 3.6% on its current stock price of £1.585. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Vianet Group can afford its dividend, and if the dividend could grow.

View our latest analysis for Vianet Group

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. Vianet Group paid out more than half (64%) of its earnings last year, which is a regular payout ratio for most companies. 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. Vianet Group 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.

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

AIM:VNET Historical Dividend Yield, December 15th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Vianet Group's earnings per share have dropped 5.2% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last ten years, Vianet Group has lifted its dividend by approximately 0.6% a year on average.

The Bottom Line

From a dividend perspective, should investors buy or avoid Vianet Group? Vianet Group had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Wondering what the future holds for Vianet Group? See what the two analysts we track 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.

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.