Fonix (LON:FNX) Is Increasing Its Dividend To £0.059

The board of Fonix Plc (LON:FNX) has announced that it will be paying its dividend of £0.059 on the 28th of November, an increased payment from last year's comparable dividend. Despite this raise, the dividend yield of 4.6% is only a modest boost to shareholder returns.

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Fonix's Future Dividend Projections Appear Well Covered By Earnings

Even a low dividend yield can be attractive if it is sustained for years on end. At the time of the last dividend payment, Fonix was paying out a very large proportion of what it was earning and 143% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

If the trend of the last few years continues, EPS will grow by 13.0% over the next 12 months. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 48% which brings it into quite a comfortable range.

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Fonix Is Still Building Its Track Record

It is great to see that Fonix has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. Since 2020, the dividend has gone from £0.034 total annually to £0.088. This implies that the company grew its distributions at a yearly rate of about 21% over that duration. It is always nice to see strong dividend growth, but with such a short payment history we wouldn't be inclined to rely on it until a longer track record can be developed.

Dividend Growth Could Be Constrained

The company's investors will be pleased to have been receiving dividend income for some time. Fonix has impressed us by growing EPS at 13% per year over the past five years. The payout ratio is very much on the higher end, which could mean that the growth rate will slow down in the future, and that could flow through to the dividend as well.

The Dividend Could Prove To Be Unreliable

In summary, while it's always good to see the dividend being raised, we don't think Fonix's payments are rock solid. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 1 warning sign for Fonix that investors need to be conscious of moving forward. Is Fonix not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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