Could Vita Group Limited (ASX:VTG) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
In this case, Vita Group likely looks attractive to dividend investors, given its 7.9% dividend yield and nine-year payment history. We'd agree the yield does look enticing. There are a few simple ways to reduce the risks of buying Vita Group for its dividend, and we'll go through these below.
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Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Vita Group paid out 61% of its profit as dividends, over the trailing twelve month period. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. The company paid out 71% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Vita Group has available to meet other needs. It's positive to see that Vita Group's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
With a strong net cash balance, Vita Group investors may not have much to worry about in the near term from a dividend perspective.
We update our data on Vita Group every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the last decade of data, we can see that Vita Group paid its first dividend at least nine years ago. It's good to see that Vita Group has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was AU$0.04 in 2011, compared to AU$0.092 last year. This works out to be a compound annual growth rate (CAGR) of approximately 9.7% a year over that time. Vita Group's dividend payments have fluctuated, so it hasn't grown 9.7% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.