Do These 3 Checks Before Buying Formpipe Software AB (publ) (STO:FPIP) For Its Upcoming Dividend

Readers hoping to buy Formpipe Software AB (publ) (STO:FPIP) 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 two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Therefore, if you purchase Formpipe Software's shares on or after the 30th of April, you won't be eligible to receive the dividend, when it is paid on the 7th of May.

The company's next dividend payment will be kr00.25 per share, on the back of last year when the company paid a total of kr0.50 to shareholders. Based on the last year's worth of payments, Formpipe Software stock has a trailing yield of around 1.9% on the current share price of kr025.70. If you buy this business for its dividend, you should have an idea of whether Formpipe Software's dividend is reliable and sustainable. As a result, readers should always check whether Formpipe Software has been able to grow its dividends, or if the dividend might be cut.

We've discovered 2 warning signs about Formpipe Software. View them for free.

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Formpipe Software distributed an unsustainably high 159% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Dividends consumed 56% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's good to see that while Formpipe Software's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

See our latest analysis for Formpipe Software

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Formpipe Software's 14% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last nine years, Formpipe Software has lifted its dividend by approximately 20% a year on average. 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. Formpipe Software 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

From a dividend perspective, should investors buy or avoid Formpipe Software? Earnings per share have been in decline, which is not encouraging. What's more, Formpipe Software is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that being said, if you're still considering Formpipe Software as an investment, you'll find it beneficial to know what risks this stock is facing. Case in point: We've spotted 2 warning signs for Formpipe Software you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.