Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Fletcher King Plc (LON:FLK) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 1st of October in order to be eligible for this dividend, which will be paid on the 30th of October.
Fletcher King's next dividend payment will be UK£0.005 per share. Last year, in total, the company distributed UK£0.018 to shareholders. Last year's total dividend payments show that Fletcher King has a trailing yield of 5.3% on the current share price of £0.33. If you buy this business for its dividend, you should have an idea of whether Fletcher King's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. An unusually high payout ratio of 353% of its profit suggests something is happening other than the usual distribution of profits to shareholders. 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. It paid out 18% of its free cash flow as dividends last year, which is conservatively low.
It's good to see that while Fletcher King'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. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fletcher King's earnings per share have plummeted approximately 37% a year over the previous five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Fletcher King has delivered 1.6% dividend growth per year on average over the past 10 years.
The Bottom Line
Is Fletcher King an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 353% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Fletcher King's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
So if you're still interested in Fletcher King despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, we've found 5 warning signs for Fletcher King (2 are 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.
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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