FFI Holdings Limited's (ASX:FFI) dividend will be increasing to AU$0.14 on 24th of September. This will take the dividend yield from 3.9% to 3.9%, providing a nice boost to shareholder returns.
FFI Holdings' Payment Has Solid Earnings Coverage
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, FFI Holdings' dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 636% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.
Looking forward, earnings per share could rise by 9.8% over the next year if the trend from the last few years continues. If the dividend continues on this path, the payout ratio could be 71% by next year, which we think can be pretty sustainable going forward.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2011, the dividend has gone from AU$0.25 to AU$0.26. Its dividends have grown at less than 1% per annum over this time frame. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.
FFI Holdings Could Grow Its Dividend
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. It's encouraging to see FFI Holdings has been growing its earnings per share at 9.8% a year over the past five years. The payout ratio is very much on the higher end, which could mean that the growth rate will slow down in the future, and that could flow through to the dividend as well.
Our Thoughts On FFI Holdings' Dividend
In summary, while it's always good to see the dividend being raised, we don't think FFI Holdings' payments are rock solid. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. Overall, we don't think this company has the makings of a good income stock.
Market movements attest to how highly valued a consistent dividend policy is compared to one 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 example, we've picked out 3 warning signs for FFI Holdings that investors should know about before committing capital to this stock. 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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