Dividend Investors: Don't Be Too Quick To Buy FAN Communications, Inc. (TSE:2461) For Its Upcoming Dividend
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 FAN Communications, Inc. (TSE:2461) is about to go ex-dividend in just three days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, FAN Communications investors that purchase the stock on or after the 29th of December will not receive the dividend, which will be paid on the 27th of March.
The company's next dividend payment will be JP¥19.00 per share, and in the last 12 months, the company paid a total of JP¥27.00 per share. Based on the last year's worth of payments, FAN Communications stock has a trailing yield of around 5.1% on the current share price of JP¥530.00. If you buy this business for its dividend, you should have an idea of whether FAN Communications's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
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. FAN Communications paid out 125% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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. Dividends consumed 73% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and FAN Communications fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Check out our latest analysis for FAN Communications
Click here to see how much of its profit FAN Communications paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. FAN Communications's earnings per share have fallen at approximately 8.0% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, FAN Communications has lifted its dividend by approximately 4.7% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. FAN Communications is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
Final Takeaway
Has FAN Communications got what it takes to maintain its dividend payments? Earnings per share have been in decline, which is not encouraging. What's more, FAN Communications is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
With that in mind though, if the poor dividend characteristics of FAN Communications don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 2 warning signs for FAN Communications that we recommend you consider before investing in the business.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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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.