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Should Income Investors Look At Fortescue Metals Group Limited (ASX:FMG) Before Its Ex-Dividend?

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Fortescue Metals Group Limited (ASX:FMG) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 2nd of September in order to be eligible for this dividend, which will be paid on the 2nd of October.

Fortescue Metals Group's next dividend payment will be US$0.24 per share, and in the last 12 months, the company paid a total of US$0.29 per share. Based on the last year's worth of payments, Fortescue Metals Group has a trailing yield of 5.6% on the current stock price of A$7.66. If you buy this business for its dividend, you should have an idea of whether Fortescue Metals Group's dividend is reliable and sustainable. As a result, readers should always check whether Fortescue Metals Group has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Fortescue Metals Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortescue Metals Group paid out just 4.7% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out more than half (67%) of its free cash flow in the past year, which is within an average range for most companies.

It's positive to see that Fortescue Metals Group's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

ASX:FMG Historical Dividend Yield, August 28th 2019

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Fortescue Metals Group earnings per share are up 3.3% per annum over the last five years. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Fortescue Metals Group has delivered an average of 19% per year annual increase in its dividend, based on the past 9 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

Has Fortescue Metals Group got what it takes to maintain its dividend payments? Earnings per share have been growing at a steady rate, and Fortescue Metals Group paid out less than half its profits and more than half its free cash flow as dividends over the last year. Overall, it's hard to get excited about Fortescue Metals Group from a dividend perspective.

Wondering what the future holds for Fortescue Metals Group? See what the 15 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

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.