Factors Income Investors Should Consider Before Adding Fuller, Smith & Turner P.L.C. (LON:FSTA) To Their Portfolio

Dividend paying stocks like Fuller, Smith & Turner P.L.C. (LON:FSTA) tend to be popular with investors, and for good reason – some research suggests a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

In this case, Fuller Smith & Turner likely looks attractive to investors, given its 3.1% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. Remember that the recent share price drop will make Fuller Smith & Turner’s yield look higher, even though recent events might have impacted the company’s prospects. There are a few simple ways to reduce the risks of buying Fuller Smith & Turner for its dividend, and we’ll go through these below.

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LSE:FSTA Historical Dividend Yield, March 18th 2020
LSE:FSTA Historical Dividend Yield, March 18th 2020

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. In the last year, Fuller Smith & Turner paid out 89% of its profit as dividends. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.

We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Unfortunately, while Fuller Smith & Turner pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it’s not ideal from a dividend perspective.

Consider getting our latest analysis on Fuller Smith & Turner’s financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. For the purpose of this article, we only scrutinise the last decade of Fuller Smith & Turner’s dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was UK£0.099 in 2010, compared to UK£0.20 last year. Dividends per share have grown at approximately 7.4% per year over this time.

Dividends have grown at a reasonable rate over this period, and without any major cuts in the payment over time, we think this is an attractive combination.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Fuller Smith & Turner’s earnings per share have shrunk at 15% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Fuller Smith & Turner’s earnings per share, which support the dividend, have been anything but stable.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, the company has a payout ratio that was within an average range for most dividend stocks, but it paid out virtually all of its generated cash flow. Second, earnings per share have actually shrunk, but at least the dividends have been relatively stable. In summary, Fuller Smith & Turner has a number of shortcomings that we’d find it hard to get past. Things could change, but we think there are a number of better ideas out there.

Market movements attest to how highly valued a consistent dividend policy is to one to which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we’ve picked out 3 warning signs for Fuller Smith & Turner that investors should take into consideration.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.