Is Formpipe Software AB (publ) (STO:FPIP) An Attractive Dividend Stock?

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Simply Wall St

Thu, Sep 26, 2019, 10:51 PM

Could Formpipe Software AB (publ) (STO:FPIP) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

While Formpipe Software's 2.6% dividend yield is not the highest, we think its lengthy payment history is quite interesting. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Click the interactive chart for our full dividend analysis

OM:FPIP Historical Dividend Yield, September 27th 2019

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, Formpipe Software paid out 85% of its profit as dividends. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Formpipe Software paid out 96% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. While Formpipe Software's dividends were covered by the company's reported profits, free cash flow is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Formpipe Software's ability to maintain its dividend.

While the above analysis focuses on dividends relative to a company's earnings, we do note Formpipe Software's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Formpipe Software's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Formpipe Software has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was kr0.50 in 2009, compared to kr0.60 last year. This works out to be a compound annual growth rate (CAGR) of approximately 1.8% a year over that time. The dividends haven't grown at precisely 1.8% every year, but this is a useful way to average out the historical rate of growth.

Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Formpipe Software has grown its earnings per share at 19% per annum over the past five years. EPS are growing rapidly, although the company is also paying out more than three-quarters of its profits as dividends. If earnings keep growing, the dividend may be sustainable, but generally we'd prefer to see a fast growing company reinvest in further growth.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Formpipe Software gets a pass on its dividend payout ratio, but it paid out virtually all of its cash flow as dividends. This may just be a one-off, but we'd keep an eye on this. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Formpipe Software out there.

Now, if you want to look closer, it would be worth checking out our free research on Formpipe Software management tenure, salary, and performance.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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.

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