Here's Why We're Wary Of Buying FFI Holdings' (ASX:FFI) For Its Upcoming Dividend

FFI Holdings Limited (ASX:FFI) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 14th of September, you won't be eligible to receive this dividend, when it is paid on the 25th of September.

FFI Holdings's next dividend payment will be AU$0.13 per share. Last year, in total, the company distributed AU$0.24 to shareholders. Based on the last year's worth of payments, FFI Holdings has a trailing yield of 4.6% on the current stock price of A$5.17. If you buy this business for its dividend, you should have an idea of whether FFI Holdings's dividend is reliable and sustainable. As a result, readers should always check whether FFI Holdings has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for FFI Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 75% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. 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 an unsustainably high 1,689% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how FFI Holdings intends to continue funding this dividend, or if it could be forced to the payment.

FFI Holdings paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were FFI Holdings to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at FFI Holdings, with earnings per share up 7.1% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. FFI Holdings has delivered an average of 1.3% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Final Takeaway

From a dividend perspective, should investors buy or avoid FFI Holdings? Earnings per share have grown somewhat, although FFI Holdings paid out over half its profits and the dividend was not well covered by free cash flow. It's not that we think FFI Holdings is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in FFI Holdings despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. To help with this, we've discovered 2 warning signs for FFI Holdings that you should be aware of before investing in their shares.

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.

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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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