Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Fuller, Smith & Turner P.L.C. (LON:FSTA) is about to trade ex-dividend in the next three days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Fuller Smith & Turner's shares on or after the 14th of December will not receive the dividend, which will be paid on the 2nd of January.
The company's upcoming dividend is UK£0.066 a share, following on from the last 12 months, when the company distributed a total of UK£0.17 per share to shareholders. Last year's total dividend payments show that Fuller Smith & Turner has a trailing yield of 2.4% on the current share price of £6.9. 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 Fuller Smith & Turner has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year Fuller Smith & Turner paid out 96% of its profits as dividends to shareholders, suggesting the dividend is not well covered by 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. It distributed 31% of its free cash flow as dividends, a comfortable payout level for most companies.
It's good to see that while Fuller Smith & Turner's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.
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. Readers will understand then, why we're concerned to see Fuller Smith & Turner's earnings per share have dropped 20% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Fuller Smith & Turner has delivered an average of 2.0% per year annual increase in its dividend, based on the past 10 years of dividend payments.
To Sum It Up
From a dividend perspective, should investors buy or avoid Fuller Smith & Turner? It's not a great combination to see a company with earnings in decline and paying out 96% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Fuller Smith & Turner's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Fuller Smith & Turner.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Fuller Smith & Turner. In terms of investment risks, we've identified 2 warning signs with Fuller Smith & Turner and understanding them should be part of your investment process.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.