Should You Buy FutureFuel Corp. (NYSE:FF) For Its Upcoming Dividend?

By
Simply Wall St
Published
November 25, 2020
NYSE:FF

FutureFuel Corp. (NYSE:FF) stock is about to trade ex-dividend in four days. If you purchase the stock on or after the 30th of November, you won't be eligible to receive this dividend, when it is paid on the 15th of December.

FutureFuel's next dividend payment will be US$0.06 per share, on the back of last year when the company paid a total of US$0.24 to shareholders. Based on the last year's worth of payments, FutureFuel has a trailing yield of 2.0% on the current stock price of $12.16. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether FutureFuel has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for FutureFuel

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. FutureFuel paid out just 9.3% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. What's good is that dividends were well covered by free cash flow, with the company paying out 13% of its cash flow last year.

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 FutureFuel paid out over the last 12 months.

historic-dividend
NYSE:FF Historic Dividend November 25th 2020

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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, FutureFuel's earnings per share have been growing at 16% a year for the past five years. Earnings per share have been growing rapidly and the company is retaining a majority of its earnings within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. FutureFuel has seen its dividend decline 2.2% per annum on average over the past 10 years, which is not great to see. FutureFuel 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.

Final Takeaway

Is FutureFuel worth buying for its dividend? FutureFuel has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. There's a lot to like about FutureFuel, and we would prioritise taking a closer look at it.

On that note, you'll want to research what risks FutureFuel is facing. For example, we've found 2 warning signs for FutureFuel (1 is a bit unpleasant!) that deserve your attention before investing in the shares.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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.
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