Why It Might Not Make Sense To Buy Victrex plc (LON:VCT) For Its Upcoming Dividend
Victrex plc (LON:VCT) stock is about to trade ex-dividend in two days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Therefore, if you purchase Victrex's shares on or after the 26th of May, you won't be eligible to receive the dividend, when it is paid on the 29th of June.
The company's next dividend payment will be UK£0.13 per share. Last year, in total, the company distributed UK£0.60 to shareholders. Looking at the last 12 months of distributions, Victrex has a trailing yield of approximately 3.5% on its current stock price of £17.2. If you buy this business for its dividend, you should have an idea of whether Victrex's dividend is reliable and sustainable. As a result, readers should always check whether Victrex has been able to grow its dividends, or if the dividend might be cut.
View our latest analysis for Victrex
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Victrex is paying out an acceptable 74% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Victrex generated enough free cash flow to afford its dividend. It paid out 107% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.
While Victrex'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. Cash is king, as they say, and were Victrex to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's not ideal to see Victrex's earnings per share have been shrinking at 3.5% a year over the previous five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Victrex has increased its dividend at approximately 6.2% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.
To Sum It Up
Has Victrex got what it takes to maintain its dividend payments? Victrex had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not that we think Victrex is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
So if you're still interested in Victrex despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. In terms of investment risks, we've identified 1 warning sign with Victrex and understanding them should be part of your investment process.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
