Dividend paying stocks like Fope S.p.A. (BIT:FPE) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
Fope yields a solid 3.8%, although it has only been paying for two years. A high yield probably looks enticing, but investors are likely wondering about the short payment history. Some simple analysis can reduce the risk of holding Fope for its dividend, and we'll focus on the most important aspects below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Fope paid out 52% of its profit as dividends, over the trailing twelve month period. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Fope paid out 363% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. Fope paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Fope's ability to maintain its dividend.
Consider getting our latest analysis on Fope's financial position here.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. During the past two-year period, the first annual payment was €0.13 in 2018, compared to €0.35 last year. Dividends per share have grown at approximately 67% per year over this time.
Fope has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Fope has grown its EPS 36% over the past 12 months. It's good to see earnings per share rising, but one year is too short a period to get excited about. Were this trend to continue, we'd be interested. With recent, rapid earnings per share growth and a payout ratio of 52%, this business looks like an interesting prospect if earnings are reinvested effectively. We do note though, one year is too short a time to be drawing strong conclusions about a company's future prospects.
We'd also point out that Fope issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
To summarise, shareholders should always check that Fope's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Fope gets a pass on its dividend payout ratio, but it paid out virtually all of its cash flow as dividends. This may just be a one-off, but we'd keep an eye on this. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. In sum, we find it hard to get excited about Fope from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.
Now, if you want to look closer, it would be worth checking out our free research on Fope management tenure, salary, and performance.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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