Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see LifeVantage Corporation (NASDAQ:LFVN) is about to trade ex-dividend in the next three days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Therefore, if you purchase LifeVantage's shares on or after the 30th of November, you won't be eligible to receive the dividend, when it is paid on the 15th of December.
The company's next dividend payment will be US$0.03 per share, and in the last 12 months, the company paid a total of US$0.12 per share. Based on the last year's worth of payments, LifeVantage stock has a trailing yield of around 3.2% on the current share price of $3.77. 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 LifeVantage can afford its dividend, and if the dividend could grow.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. LifeVantage paid out 183% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 18% of its free cash flow as dividends last year, which is conservatively low.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and LifeVantage fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see LifeVantage's earnings per share have dropped 23% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Unfortunately LifeVantage has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.
To Sum It Up
Should investors buy LifeVantage for the upcoming dividend? It's not a great combination to see a company with earnings in decline and paying out 183% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in LifeVantage's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think LifeVantage is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
With that being said, if you're still considering LifeVantage as an investment, you'll find it beneficial to know what risks this stock is facing. For example - LifeVantage has 4 warning signs we think you should be aware of.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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