Don’t Buy Fonix Mobile plc (LON:FNX) For Its Next Dividend Without Doing These Checks

Fonix Mobile plc (LON:FNX) stock is about to trade ex-dividend in 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important as the settlement process involves two full business days. So if you miss that date, you would not show up on the company’s books on the record date. Accordingly, Fonix Mobile investors that purchase the stock on or after the 24th of November will not receive the dividend, which will be paid on the 30th of November.

The company’s next dividend payment will be UK£0.045 per share, and in the last 12 months, the company paid a total of UK£0.055 per share. Last year’s total dividend payments show that Fonix Mobile has a trailing yield of 3.3% on the current share price of £1.95. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! That’s why we should always check whether the dividend payments appear sustainable, and whether the company is growing.

Our analysis indicates that FNX is potentially undervalued!

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. Its dividend payout ratio is 81% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We’d be worried about the risk of a drop in earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check whether the company generated enough cash to afford its dividend. The company paid out 104% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect – but we’d generally want to look more closely here.

While Fonix Mobile’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 Fonix Mobile’s ability to maintain its dividend.

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

AIM:FNX Historic Dividend November 20th 2022

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we’re discomforted by Fonix Mobile’s 24% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Since the start of our date, two years ago, Fonix Mobile has lifted its dividend by approximately 38% a year on average. The only way to pay higher dividends when earnings are shrinking is to either pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Fonix Mobile 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.

to sum it up

Is Fonix Mobile an attractive dividend stock, or better left on the shelf? 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. It’s not that we think Fonix Mobile is a bad company, but these characteristics don’t generally lead to outstanding dividend performance.

Although, if you’re still interested in Fonix Mobile and want to know more, you’ll find it very useful to know what risks this stock faces. Our analysis shows 1 warning sign for Fonix Mobile and you should be aware of this before buying any shares.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.

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