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Dividend Investors: Don't Be Too Quick To Buy FFI Holdings Limited (ASX:FFI) For Its Upcoming Dividend

Simply Wall St

It looks like FFI Holdings Limited (ASX:FFI) is about to go ex-dividend in the next four days. This means that investors who purchase shares on or after the 14th of September will not receive the dividend, which will be paid on the 25th of September.

FFI Holdings's upcoming dividend is AU$0.13 a share, following on from the last 12 months, when the company distributed a total of AU$0.24 per share to shareholders. Last year's total dividend payments show that FFI Holdings has a trailing yield of 4.6% on the current share price of A$5.17. 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 FFI Holdings has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for FFI Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Its dividend payout ratio is 75% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be concerned if earnings began to decline. A useful secondary check can be to evaluate whether FFI Holdings generated enough free cash flow to afford its dividend. It paid out an unsustainably high 1,689% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since FFI Holdings is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

While FFI Holdings's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were FFI Holdings to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit FFI Holdings paid out over the last 12 months.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see FFI Holdings earnings per share are up 7.1% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. FFI Holdings has delivered 1.3% dividend growth per year on average over the past 10 years.

The Bottom Line

Should investors buy FFI Holdings for the upcoming dividend? Earnings per share have grown somewhat, although FFI Holdings paid out over half its profits and the dividend was not well covered by free cash flow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Although, if you're still interested in FFI Holdings and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 2 warning signs for FFI Holdings you should know about.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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.

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