Vector Limited's (NZSE:VCT) dividend will be increasing on the 16th of September to NZ$0.09, with investors receiving 3.0% more than last year. This takes the dividend yield from 4.0% to 4.2%, which shareholders will be pleased with.
Vector Is Paying Out More Than It Is Earning
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. The last dividend made up quite a large portion of free cash flows, and this was made worse by the lack of free cash flows. We think that this practice can make the dividend quite risky in the future.
Over the next year, EPS is forecast to fall by 11.8%. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 105%, which is definitely a bit high to be sustainable going forward.
Vector Has A Solid Track Record
The company has a sustained record of paying dividends with very little fluctuation. The dividend has gone from NZ$0.14 in 2011 to the most recent annual payment of NZ$0.17. This means that it has been growing its distributions at 1.8% per annum over that time. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.
Vector Might Find It Hard To Grow Its Dividend
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Vector has impressed us by growing EPS at 28% per year over the past five years. However, Vector isn't reinvesting a lot back into the business, so we wonder how quickly it will be able to grow in the future.
In summary, while it's always good to see the dividend being raised, we don't think Vector's payments are rock solid. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. This company is not in the top tier of income providing stocks.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come across 3 warning signs for Vector you should be aware of, and 2 of them are a bit concerning. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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