Viva Energy Group Limited (ASX:VEA) has announced it will be reducing its dividend payable on the 22nd of October to AU$0.062. This means the annual payment is 6.9% of the current stock price, which is above the average for the industry.
Check out our latest analysis for Viva Energy Group
Viva Energy Group Doesn't Earn Enough To Cover Its Payments
If the payments aren't sustainable, a high yield for a few years won't matter that much. The last payment made up 93% of earnings, but cash flows were much higher. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.
The next 12 months is set to see EPS grow by 164.3%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 121%, which probably can't continue putting some pressure on the balance sheet.
Viva Energy Group's Dividend Has Lacked Consistency
Looking back, the company hasn't been paying the most consistent dividend, but with such a short dividend history it could be too early to draw solid conclusions. The first annual payment during the last 3 years was AU$0.057 in 2018, and the most recent fiscal year payment was AU$0.082. This means that it has been growing its distributions at 13% per annum over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.
Dividend Growth Potential Is Shaky
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Viva Energy Group's EPS has fallen by approximately 24% per year during the past five years. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.
Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We would probably look elsewhere for an income investment.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 3 warning signs for Viva Energy Group that investors should take into consideration. 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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