Does It Make Sense To Buy Fondia Oyj (HEL:FONDIA) For Its Yield?

Is Fondia Oyj (HEL:FONDIA) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

Fondia Oyj yields a solid 3.3%, although it has only been paying for three years. A 3.3% yield does look good. Could the short payment history hint at future dividend growth? Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Explore this interactive chart for our latest analysis on Fondia Oyj!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Fondia Oyj paid out 164% of its profit as dividends. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Fondia Oyj paid out 171% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. 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.

While the above analysis focuses on dividends relative to a company's earnings, we do note Fondia Oyj's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Consider getting our latest analysis on Fondia Oyj'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. It has only been paying dividends for a few short years, and the dividend has already been cut at least once. This is one income stream we're not ready to live on. During the past three-year period, the first annual payment was €0.3 in 2017, compared to €0.3 last year. The dividend has shrunk at around 9.4% a year during that period. Fondia Oyj's dividend has been cut sharply at least once, so it hasn't fallen by 9.4% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying Fondia Oyj for its dividend, given that payments have shrunk over the past three years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Fondia Oyj's earnings per share have shrunk at 31% 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 Fondia Oyj's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Fondia Oyj's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with Fondia Oyj paying out a high percentage of both its cashflow and earnings. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. Using these criteria, Fondia Oyj looks quite suboptimal from a dividend investment perspective.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 3 warning signs for Fondia Oyj that you should be aware of before investing.

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

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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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