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Should Income Investors Look At FDM Group (Holdings) plc (LON:FDM) Before Its Ex-Dividend?

Simply Wall St

It looks like FDM Group (Holdings) plc (LON:FDM) is about to go ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 22nd of August will not receive the dividend, which will be paid on the 20th of September.

FDM Group (Holdings)'s upcoming dividend is UK£0.16 a share, following on from the last 12 months, when the company distributed a total of UK£0.32 per share to shareholders. Based on the last year's worth of payments, FDM Group (Holdings) stock has a trailing yield of around 4.2% on the current share price of £7.67. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether FDM Group (Holdings) has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for FDM Group (Holdings)

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. It paid out 88% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. A useful secondary check can be to evaluate whether FDM Group (Holdings) generated enough free cash flow to afford its dividend. It paid out 99% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

FDM Group (Holdings) paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were FDM Group (Holdings) to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

LSE:FDM Historical Dividend Yield, August 17th 2019

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see FDM Group (Holdings) has grown its earnings rapidly, up 20% a year 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.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 4 years, FDM Group (Holdings) has increased its dividend at approximately 21% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

The Bottom Line

Is FDM Group (Holdings) 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 99% of its cashflow, which is uncomfortably high. To summarise, FDM Group (Holdings) looks okay on this analysis, although it doesn't appear a stand-out opportunity.

Wondering what the future holds for FDM Group (Holdings)? See what the five 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.