Fonterra Co-operative Group's (NZSE:FCG) Dividend Will Be NZ$0.15

Fonterra Co-operative Group Limited (NZSE:FCG) has announced that it will pay a dividend of NZ$0.15 per share on the 14th of October. This means that the annual payment will be 7.1% of the current stock price, which is in line with the average for the industry.

View our latest analysis for Fonterra Co-operative Group

Fonterra Co-operative Group's Payment Has Solid Earnings Coverage

We aren't too impressed by dividend yields unless they can be sustained over time. Before making this announcement, Fonterra Co-operative Group was earning enough to cover the dividend, but it wasn't generating any free cash flows. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

EPS is set to fall by 2.1% over the next 12 months if recent trends continue. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 41%, which is definitely feasible to continue.

Fonterra Co-operative Group's Dividend Has Lacked Consistency

It's comforting to see that Fonterra Co-operative Group has been paying a dividend for a number of years now, however it has been cut at least once in that time. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. Since 2013, the annual payment back then was NZ$0.312, compared to the most recent full-year payment of NZ$0.20. Doing the maths, this is a decline of about 4.8% per year. A company that decreases its dividend over time generally isn't what we are looking for.

Dividend Growth May Be Hard To Achieve

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. Over the past five years, it looks as though Fonterra Co-operative Group's EPS has declined at around 2.1% a year. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed.

Fonterra Co-operative Group's Dividend Doesn't Look Sustainable

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We would be a touch cautious of relying on this stock primarily for the dividend income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. To that end, Fonterra Co-operative Group has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about. Is Fonterra Co-operative Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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