Why It Might Not Make Sense To Buy Lavipharm S.A. (ATH:LAVI) For Its Upcoming Dividend

Lavipharm S.A. (ATH:LAVI) is about to trade ex-dividend in the next three days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase Lavipharm's shares before the 20th of July in order to be eligible for the dividend, which will be paid on the 24th of July.

The company's upcoming dividend is €0.02 a share, following on from the last 12 months, when the company distributed a total of €0.02 per share to shareholders. Calculating the last year's worth of payments shows that Lavipharm has a trailing yield of 1.4% on the current share price of €1.43. 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 investigate whether Lavipharm can afford its dividend, and if the dividend could grow.

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Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Lavipharm distributed an unsustainably high 172% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Lavipharm paid out more free cash flow than it generated - 165%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cash is slightly more important than profit from a dividend perspective, but given Lavipharm's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

View our latest analysis for Lavipharm

Click here to see how much of its profit Lavipharm paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Lavipharm's earnings per share have fallen at approximately 24% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Given that Lavipharm has only been paying a dividend for a year, there's not much of a past history to draw insight from.

The Bottom Line

Is Lavipharm worth buying for its dividend? Not only are earnings per share declining, but Lavipharm is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that in mind though, if the poor dividend characteristics of Lavipharm don't faze you, it's worth being mindful of the risks involved with this business. In terms of investment risks, we've identified 2 warning signs with Lavipharm and understanding them should be part of your investment process.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.