Fraser and Neave, Limited (SGX:F99) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 4th of February to receive the dividend, which will be paid on the 18th of February.
Fraser and Neave's next dividend payment will be S$0.04 per share, on the back of last year when the company paid a total of S$0.055 to shareholders. Looking at the last 12 months of distributions, Fraser and Neave has a trailing yield of approximately 3.2% on its current stock price of SGD1.71. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
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. Fraser and Neave paid out more than half (52%) of its earnings last year, which is a regular payout ratio for most companies. 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. Fraser and Neave paid out more free cash flow than it generated - 189%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
While Fraser and Neave'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 Fraser and Neave to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see Fraser and Neave's earnings have been skyrocketing, up 31% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Fraser and Neave has seen its dividend decline 8.6% per annum on average over the past ten years, which is not great to see. Fraser and Neave 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.
To Sum It Up
Is Fraser and Neave worth buying for its dividend? It's good to see that earnings per share are growing and that the company's payout ratio is within a normal range for most businesses. However we're somewhat concerned that it paid out 189% of its cashflow, which is uncomfortably high. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
Want to learn more about Fraser and Neave's dividend performance? Check out this visualisation of its historical revenue and earnings growth.
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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