Should You Buy The Foschini Group Limited (JSE:TFG) For Its Upcoming Dividend?
The Foschini Group Limited (JSE:TFG) is about to trade ex-dividend in the next 4 days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase Foschini Group's shares before the 15th of July to receive the dividend, which will be paid on the 20th of July.
The company's next dividend payment will be R01.40 per share. Last year, in total, the company distributed R2.70 to shareholders. Calculating the last year's worth of payments shows that Foschini Group has a trailing yield of 4.5% on the current share price of R059.79. If you buy this business for its dividend, you should have an idea of whether Foschini Group's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Foschini Group paid out more than half (66%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. What's good is that dividends were well covered by free cash flow, with the company paying out 20% of its cash flow last year.
It's positive to see that Foschini 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.
Check out our latest analysis for Foschini Group
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Foschini Group has grown its earnings rapidly, up 23% a year for the past five years. Management appears to be striking a nice balance between reinvesting for growth and paying dividends to shareholders. Earnings per share have been growing quickly and in combination with some reinvestment and a middling payout ratio, the stock may have decent dividend prospects going forwards.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Foschini Group has seen its dividend decline 7.5% per annum on average over the past 10 years, which is not great to see. Foschini Group is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
Should investors buy Foschini Group for the upcoming dividend? We like Foschini Group's growing earnings per share and the fact that - while its payout ratio is around average - it paid out a lower percentage of its cash flow. It's a promising combination that should mark this company worthy of closer attention.
In light of that, while Foschini Group has an appealing dividend, it's worth knowing the risks involved with this stock. For example, we've found 3 warning signs for Foschini Group 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.