Do These 3 Checks Before Buying Fondia Oyj (HEL:FONDIA) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Fondia Oyj (HEL:FONDIA) is about to go ex-dividend in just three days. This means that investors who purchase shares on or after the 19th of March will not receive the dividend, which will be paid on the 29th of March.

Fondia Oyj's next dividend payment will be €0.28 per share. Last year, in total, the company distributed €0.28 to shareholders. Based on the last year's worth of payments, Fondia Oyj has a trailing yield of 3.8% on the current stock price of €7.38. If you buy this business for its dividend, you should have an idea of whether Fondia Oyj's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Fondia Oyj

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Fondia Oyj distributed an unsustainably high 133% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year, it paid out dividends equivalent to 276% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Fondia Oyj intends to continue funding this dividend, or if it could be forced to cut the payment.

Fondia Oyj does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

As Fondia Oyj's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fondia Oyj's earnings per share have fallen at approximately 28% 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Fondia Oyj has seen its dividend decline 7.2% per annum on average over the past three years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Final Takeaway

Should investors buy Fondia Oyj for the upcoming dividend? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (133%) and cash flow as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Fondia Oyj.

So if you're still interested in Fondia Oyj despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, we've found 3 warning signs for Fondia Oyj (1 is a bit unpleasant!) that deserve your attention before investing in the shares.

If you're in the market for dividend stocks, we recommend checking our list of top 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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