Readers hoping to buy Fonterra Co-operative Group Limited (NZSE:FCG) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. 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. Thus, you can purchase Fonterra Co-operative Group's shares before the 22nd of March in order to receive the dividend, which the company will pay on the 14th of April.

The company's next dividend payment will be NZ$0.10 per share, and in the last 12 months, the company paid a total of NZ$0.20 per share. Calculating the last year's worth of payments shows that Fonterra Co-operative Group has a trailing yield of 6.9% on the current share price of NZ$2.88. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Fonterra Co-operative Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see Fonterra Co-operative Group paying out a modest 47% of its earnings. 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. It paid out more than half (69%) of its free cash flow in the past year, which is within an average range for most companies.

It's positive to see that Fonterra Co-operative 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.

Click here to see how much of its profit Fonterra Co-operative Group paid out over the last 12 months.

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. With that in mind, we're encouraged by the steady growth at Fonterra Co-operative Group, with earnings per share up 3.0% on average over the last five years. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Fonterra Co-operative Group's dividend payments per share have declined at 4.4% per year on average over the past 10 years, which is uninspiring. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.

Final Takeaway

Is Fonterra Co-operative Group an attractive dividend stock, or better left on the shelf? Earnings per share growth has been modest, and it's interesting that Fonterra Co-operative Group is paying out less than half of its earnings and more than half its cash flow to shareholders in the form of dividends. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.

On that note, you'll want to research what risks Fonterra Co-operative Group is facing. Case in point: We've spotted 2 warning signs for Fonterra Co-operative Group you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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