Stock Analysis

Fonterra Co-operative Group Limited (NZSE:FCG) Is About To Go Ex-Dividend, And It Pays A 6.9% Yield

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Readers hoping to buy Fonterra Co-operative Group Limited (NZSE:FCG) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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. This means that investors who purchase Fonterra Co-operative Group's shares on or after the 22nd of March will not receive the dividend, which will be paid on the 14th of April.

The company's next dividend payment will be NZ$0.10 per share, on the back of last year when the company paid a total of NZ$0.20 to shareholders. Looking at the last 12 months of distributions, Fonterra Co-operative Group has a trailing yield of approximately 6.9% on its current stock price of NZ$2.88. 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 Fonterra Co-operative Group

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. That's why it's good to see Fonterra Co-operative Group paying out a modest 47% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out more than half (69%) of its free cash flow in the past year, which is within an average range for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see how much of its profit Fonterra Co-operative Group paid out over the last 12 months.

NZSE:FCG Historic Dividend March 20th 2023

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Fonterra Co-operative Group, with earnings per share up 3.0% on average over the last five years. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Fonterra Co-operative Group's dividend payments per share have declined at 4.4% per year on average over the past 10 years, which is uninspiring. Fonterra Co-operative 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.

To Sum It Up

From a dividend perspective, should investors buy or avoid Fonterra Co-operative Group? Earnings per share have been growing at a steady rate, and Fonterra Co-operative Group paid out less than half its profits and more than half its free cash flow as dividends over the last year. Overall, it's hard to get excited about Fonterra Co-operative Group from a dividend perspective.

On that note, you'll want to research what risks Fonterra Co-operative Group is facing. In terms of investment risks, we've identified 2 warning signs with Fonterra Co-operative Group and understanding them should be part of your investment process.

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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