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Is It Smart To Buy First Derivatives plc (LON:FDP) Before It Goes Ex-Dividend?

Simply Wall St

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that First Derivatives plc (LON:FDP) is about to go ex-dividend in just 3 days. This means that investors who purchase shares on or after the 14th of November will not receive the dividend, which will be paid on the 5th of December.

First Derivatives's next dividend payment will be UK£0.09 per share, on the back of last year when the company paid a total of UK£0.3 to shareholders. Looking at the last 12 months of distributions, First Derivatives has a trailing yield of approximately 1.1% on its current stock price of £23.5. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for First Derivatives

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. First Derivatives paid out more than half (53%) of its earnings last year, which is a regular payout ratio for most companies. 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. Fortunately, it paid out only 48% of its free cash flow in the past year.

It's positive to see that First Derivatives'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.

AIM:FDP Historical Dividend Yield, November 10th 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. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at First Derivatives, with earnings per share up 9.0% on average over the last five years. Decent historical earnings per share growth suggests First Derivatives has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past ten years, First Derivatives has increased its dividend at approximately 12% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

Is First Derivatives worth buying for its dividend? Earnings per share growth has been modest and First Derivatives paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. Overall, it's hard to get excited about First Derivatives from a dividend perspective.

Wondering what the future holds for First Derivatives? See what the four 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.