Fortescue Metals Group Limited (ASX:FMG) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 2nd of March will not receive this dividend, which will be paid on the 6th of April.
Fortescue Metals Group's next dividend payment will be AU$0.76 per share, which looks like a nice increase on last year, when the company distributed a total of AU$0.28 to shareholders. If you buy this business for its dividend, you should have an idea of whether Fortescue Metals Group's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see Fortescue Metals Group paying out a modest 43% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fortunately, it paid out only 43% of its free cash flow in the past year.
It's positive to see that Fortescue Metals Group's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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, Fortescue Metals Group's earnings per share have been growing at 13% a year for the past five years. Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Fortescue Metals Group has delivered an average of 19% per year annual increase in its dividend, based on the past nine years of dividend payments. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
The Bottom Line
Is Fortescue Metals Group worth buying for its dividend? It's great that Fortescue Metals Group is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. It's a promising combination that should mark this company worthy of closer attention.
Ever wonder what the future holds for Fortescue Metals Group? See what the 15 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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