We Wouldn't Be Too Quick To Buy Fonix Mobile plc (LON:FNX) Before It Goes Ex-Dividend

Readers hoping to buy Fonix Mobile plc (LON:FNX) 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase Fonix Mobile's shares before the 23rd of March in order to receive the dividend, which the company will pay on the 31st of March.

The company's upcoming dividend is UK£0.024 a share, following on from the last 12 months, when the company distributed a total of UK£0.069 per share to shareholders. Last year's total dividend payments show that Fonix Mobile has a trailing yield of 3.5% on the current share price of £1.94. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Fonix Mobile

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 76% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings.

Companies that pay out less in dividends than they earn in profits generally have more sustainable dividends. The lower the payout ratio, the more wiggle room the business has before it could be forced to cut the dividend.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fonix Mobile's earnings per share have fallen at approximately 23% 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.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Fonix Mobile has delivered 42% dividend growth per year on average over the past two years. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Fonix Mobile is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Has Fonix Mobile got what it takes to maintain its dividend payments? Earnings per share have been declining and the company is paying out more than half its profits to shareholders; not an enticing combination. Fonix Mobile doesn't appear to have a lot going for it, and we're not inclined to take a risk on owning it for the dividend.

With that in mind though, if the poor dividend characteristics of Fonix Mobile don't faze you, it's worth being mindful of the risks involved with this business. In terms of investment risks, we've identified 1 warning sign with Fonix Mobile and understanding them should be part of your investment process.

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.