Is It Smart To Buy Vita Life Sciences Limited (ASX:VLS) Before It Goes Ex-Dividend?

Vita Life Sciences Limited (ASX:VLS) is about to trade ex-dividend in the next four days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Thus, you can purchase Vita Life Sciences' shares before the 18th of September in order to receive the dividend, which the company will pay on the 2nd of October.

The company's upcoming dividend is AU$0.05 a share, following on from the last 12 months, when the company distributed a total of AU$0.14 per share to shareholders. Looking at the last 12 months of distributions, Vita Life Sciences has a trailing yield of approximately 5.1% on its current stock price of AU$2.76. If you buy this business for its dividend, you should have an idea of whether Vita Life Sciences's dividend is reliable and sustainable. As a result, readers should always check whether Vita Life Sciences has been able to grow its dividends, or if the dividend might be cut.

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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. Vita Life Sciences paid out 72% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out more than half (52%) of its free cash flow in the past year, which is within an average range for most companies.

It's positive to see that Vita Life Sciences'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.

See our latest analysis for Vita Life Sciences

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

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 earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Vita Life Sciences's earnings per share have risen 11% per annum over the last five years. Vita Life Sciences is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. This is a reasonable combination that could hint at some further dividend increases in the future.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Vita Life Sciences has delivered 14% dividend growth per year on average over the past 10 years. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Final Takeaway

Is Vita Life Sciences worth buying for its dividend? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. However, we'd also note that Vita Life Sciences is paying out more than half of its earnings and cash flow as profits, which could limit the dividend growth if earnings growth slows. Overall, it's hard to get excited about Vita Life Sciences from a dividend perspective.

While it's tempting to invest in Vita Life Sciences for the dividends alone, you should always be mindful of the risks involved. Our analysis shows 1 warning sign for Vita Life Sciences and you should be aware of it before buying any shares.

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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.