Vector Limited (NZSE:VCT) has announced that it will pay a dividend of NZ$0.087 per share on the 8th of April. The dividend yield will be 4.6% based on this payment which is still above the industry average.
Vector Doesn't Earn Enough To Cover Its Payments
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Vector's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 6,071% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.
EPS is set to fall by 10.7% over the next 12 months. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 97%, which is definitely a bit high to be sustainable going forward.
Vector Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. The dividend has gone from NZ$0.14 in 2012 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
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. We are encouraged to see that Vector has grown earnings per share at 16% per year over the past five years. The payout ratio is very much on the higher end, which could mean that the growth rate will slow down in the future, and that could flow through to the dividend as well.
Our Thoughts On Vector's Dividend
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Vector's payments, as there could be some issues with sustaining them into the future. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. We don't think Vector is a great stock to add to your portfolio if income is your focus.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Just as an example, we've come across 3 warning signs for Vector you should be aware of, and 2 of them don't sit too well with us. Is Vector not quite the opportunity you were looking for? Why not check out 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.