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We Wouldn't Be Too Quick To Buy FFI Holdings Limited (ASX:FFI) 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 FFI Holdings Limited (ASX:FFI) is about to go ex-dividend in just 4 days. If you purchase the stock on or after the 16th of September, you won't be eligible to receive this dividend, when it is paid on the 27th of September.

FFI Holdings's next dividend payment will be AU$0.12 per share, and in the last 12 months, the company paid a total of AU$0.24 per share. Looking at the last 12 months of distributions, FFI Holdings has a trailing yield of approximately 5.1% on its current stock price of A$4.72. If you buy this business for its dividend, you should have an idea of whether FFI Holdings's dividend is reliable and sustainable. So we need to investigate whether FFI Holdings can afford its dividend, and if the dividend could grow.

View our latest analysis for FFI Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. FFI Holdings paid out more than half (71%) 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. Over the past year it paid out 148% of its free cash flow as dividends, which is uncomfortably 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 FFI Holdings'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. Were this to happen repeatedly, this would be a risk to FFI Holdings's ability to maintain its dividend.

Click here to see how much of its profit FFI Holdings paid out over the last 12 months.

ASX:FFI Historical Dividend Yield, September 11th 2019

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's not ideal to see FFI Holdings's earnings per share have been shrinking at 3.2% a year over the previous five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. FFI Holdings has delivered an average of 2.9% per year annual increase in its dividend, based on the past 10 years of dividend payments. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

Final Takeaway

From a dividend perspective, should investors buy or avoid FFI Holdings? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of FFI Holdings.

Want to learn more about FFI Holdings's dividend performance? Check out this visualisation of its historical revenue and earnings growth.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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.