New Zealand markets close in 4 hours 33 minutes
  • NZX 50

    11,033.68
    +35.76 (+0.33%)
     
  • NZD/USD

    0.6305
    +0.0001 (+0.01%)
     
  • NZD/EUR

    0.5952
    +0.0003 (+0.05%)
     
  • ALL ORDS

    6,913.20
    +19.60 (+0.28%)
     
  • ASX 200

    6,725.40
    +19.40 (+0.29%)
     
  • OIL

    110.55
    +0.98 (+0.89%)
     
  • GOLD

    1,825.20
    +0.40 (+0.02%)
     
  • NASDAQ

    12,008.24
    -97.61 (-0.81%)
     
  • FTSE

    7,258.32
    +49.51 (+0.69%)
     
  • Dow Jones

    31,438.26
    -62.42 (-0.20%)
     
  • DAX

    13,186.07
    +67.94 (+0.52%)
     
  • Hang Seng

    22,229.52
    +510.46 (+2.35%)
     
  • NIKKEI 225

    26,921.59
    +50.32 (+0.19%)
     
  • NZD/JPY

    85.3440
    +0.0030 (+0.00%)
     

Should You Buy Vector Limited (NZSE:VCT) For Its Upcoming Dividend?

·4-min read

Readers hoping to buy Vector Limited (NZSE:VCT) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, Vector investors that purchase the stock on or after the 29th of March will not receive the dividend, which will be paid on the 8th of April.

The company's next dividend payment will be NZ$0.087 per share, and in the last 12 months, the company paid a total of NZ$0.17 per share. Based on the last year's worth of payments, Vector stock has a trailing yield of around 4.1% on the current share price of NZ$4.13. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Vector

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. It paid out 81% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. 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. It paid out an unsustainably high 5,680% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Vector is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

Vector paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Vector 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.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Vector's earnings have been skyrocketing, up 30% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Vector has lifted its dividend by approximately 1.8% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Vector is keeping back more of its profits to grow the business.

To Sum It Up

Has Vector got what it takes to maintain its dividend payments? It's good to see that earnings per share are growing and that the company's payout ratio is within a normal range for most businesses. However we're somewhat concerned that it paid out 5,680% of its cashflow, which is uncomfortably high. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.

With that being said, if dividends aren't your biggest concern with Vector, you should know about the other risks facing this business. We've identified 3 warning signs with Vector (at least 2 which are potentially serious), and understanding these should be part of your investment process.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting