It Might Not Be A Great Idea To Buy Fondia Oyj (HEL:FONDIA) For Its Next Dividend

Readers hoping to buy Fondia Oyj (HEL:FONDIA) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Fondia Oyj's shares before the 21st of March in order to be eligible for the dividend, which will be paid on the 2nd of April.

The company's next dividend payment will be €0.52 per share, and in the last 12 months, the company paid a total of €0.32 per share. Last year's total dividend payments show that Fondia Oyj has a trailing yield of 4.5% on the current share price of €7.16. If you buy this business for its dividend, you should have an idea of whether Fondia Oyj's dividend is reliable and sustainable. So we need to investigate whether Fondia Oyj can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Fondia Oyj

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Fondia Oyj paid out 90% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. Fondia Oyj paid out more free cash flow than it generated - 133%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

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.

Cash is slightly more important than profit from a dividend perspective, but given Fondia Oyj's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. So we're not too excited that Fondia Oyj's earnings are down 2.8% a year over the past five years.

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 1.5% per annum on average over the past six years, which is not great to see.

Final Takeaway

Has Fondia Oyj got what it takes to maintain its dividend payments? Not only are earnings per share declining, but Fondia Oyj is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that in mind though, if the poor dividend characteristics of Fondia Oyj don't faze you, it's worth being mindful of the risks involved with this business. To that end, you should learn about the 4 warning signs we've spotted with Fondia Oyj (including 2 which make us uncomfortable).

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.