Fonterra Co-operative Group (NZSE:FCG) Will Pay A Larger Dividend Than Last Year At NZ$0.4118

The board of Fonterra Co-operative Group Limited (NZSE:FCG) has announced that it will be paying its dividend of NZ$0.4118 on the 15th of October, an increased payment from last year's comparable dividend. This takes the annual payment to 9.2% of the current stock price, which unfortunately is below what the industry is paying.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that Fonterra Co-operative Group's stock price has increased by 31% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

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Fonterra Co-operative Group's Future Dividends May Potentially Be At Risk

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Before this announcement, Fonterra Co-operative Group was paying out 91% of earnings, but a comparatively small 73% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

EPS is set to grow by 4.0% over the next year if recent trends continue. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 109% over the next year.

View our latest analysis for Fonterra Co-operative Group

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2015, the annual payment back then was NZ$0.30, compared to the most recent full-year payment of NZ$0.57. This implies that the company grew its distributions at a yearly rate of about 6.6% over that duration. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

The Dividend's Growth Prospects Are Limited

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Earnings per share has been crawling upwards at 4.0% per year. Fonterra Co-operative Group's earnings per share has barely grown, which is not ideal - perhaps this is why the company pays out the majority of its earnings to shareholders. That's fine as far as it goes, but we're less enthusiastic as this often signals that the dividend is likely to grow slower in the future.

Our Thoughts On Fonterra Co-operative Group's Dividend

In summary, while it's always good to see the dividend being raised, we don't think Fonterra Co-operative Group's payments are rock solid. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. Overall, we don't think this company has the makings of a good income stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 1 warning sign for Fonterra Co-operative Group that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated 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.