Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Vesuvius plc (LON:VSVS) is about to trade ex-dividend in the next couple of days. 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 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. In other words, investors can purchase Vesuvius' shares before the 5th of August in order to be eligible for the dividend, which will be paid on the 17th of September.

The company's upcoming dividend is UK£0.062 a share, following on from the last 12 months, when the company distributed a total of UK£0.20 per share to shareholders. Looking at the last 12 months of distributions, Vesuvius has a trailing yield of approximately 3.9% on its current stock price of £5.25. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Vesuvius

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. Its dividend payout ratio is 90% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be worried about the risk of a drop in earnings. A useful secondary check can be to evaluate whether Vesuvius generated enough free cash flow to afford its dividend. Dividends consumed 55% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Vesuvius, with earnings per share up 5.4% on average over the last five years. Decent historical earnings per share growth suggests Vesuvius has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Vesuvius has delivered an average of 1.0% per year annual increase in its dividend, based on the past eight years of dividend payments.

Final Takeaway

Is Vesuvius an attractive dividend stock, or better left on the shelf? Earnings per share growth has been unremarkable, and while the company is paying out a majority of its earnings and cash flow in the form of dividends, the dividend payments don't appear excessive. All things considered, we are not particularly enthused about Vesuvius from a dividend perspective.

However if you're still interested in Vesuvius as a potential investment, you should definitely consider some of the risks involved with Vesuvius. For example, we've found 1 warning sign for Vesuvius that we recommend you consider before investing in the business.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. 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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