Fintel (LON:FNTL) Could Be A Buy For Its Upcoming Dividend

Fintel Plc (LON:FNTL) is about to trade ex-dividend in the next 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. Accordingly, Fintel investors that purchase the stock on or after the 18th of May will not receive the dividend, which will be paid on the 19th of June.

The company's upcoming dividend is UK£0.022 a share, following on from the last 12 months, when the company distributed a total of UK£0.033 per share to shareholders. Based on the last year's worth of payments, Fintel has a trailing yield of 1.6% on the current stock price of £1.9925. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Fintel can afford its dividend, and if the dividend could grow.

See our latest analysis for Fintel

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fintel paid out a comfortable 34% of its profit last year. A useful secondary check can be to evaluate whether Fintel generated enough free cash flow to afford its dividend. The good news is it paid out just 23% of its free cash flow in the last year.

It's positive to see that Fintel'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.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Fintel earnings per share are up 2.4% per annum over the last five years. Earnings per share growth in recent times has not been a standout. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past five years, Fintel has increased its dividend at approximately 11% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Should investors buy Fintel for the upcoming dividend? Earnings per share growth has been growing somewhat, and Fintel is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice to see earnings growing faster, but Fintel is being conservative with its dividend payouts and could still perform reasonably over the long run. It's a promising combination that should mark this company worthy of closer attention.

While it's tempting to invest in Fintel for the dividends alone, you should always be mindful of the risks involved. For example, we've found 1 warning sign for Fintel that we recommend you consider before investing in the business.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.