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 FIH group plc (LON:FIH) is about to go ex-dividend in just 3 days. Ex-dividend means that investors that purchase the stock on or after the 15th of August will not receive this dividend, which will be paid on the 20th of September.
FIH group’s next dividend payment will be UK£0.034 per share, on the back of last year when the company paid a total of UK£0.05 to shareholders. Based on the last year’s worth of payments, FIH group has a trailing yield of 1.5% on the current stock price of £3.25. If you buy this business for its dividend, you should have an idea of whether FIH group’s dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
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. FIH group has a low and conservative payout ratio of just 21% of its income after tax. 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.FIH group paid a dividend despite reporting negative free cash flow over the last twelve months. This may be due to heavy investment in the business, but this is still suboptimal from a dividend sustainability perspective.
It’s positive to see that FIH group’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we’re encouraged by the steady growth at FIH group, with earnings per share up 2.8% on average over the last five years.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. FIH group’s dividend payments per share have declined at 4.6% per year on average over the past 10 years, which is uninspiring. FIH group is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It’s unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
Is FIH group an attractive dividend stock, or better left on the shelf? FIH group delivered reasonable earnings per share growth in recent times, and paid out less than half its profits and -3.0% of its cash flow over the last year, which is a mediocre outcome. Overall we’re not hugely bearish on the stock, but there are likely better dividend investments out there.
Keen to explore more data on FIH group’s financial performance? Check out our visualisation of its historical revenue and earnings growth.
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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