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It looks like Flowtech Fluidpower plc (LON:FLO) is about to go ex-dividend in the next 4 days. If you purchase the stock on or after the 3rd of October, you won't be eligible to receive this dividend, when it is paid on the 29th of October.
Flowtech Fluidpower's next dividend payment will be UK£0.02 per share, and in the last 12 months, the company paid a total of UK£0.06 per share. Based on the last year's worth of payments, Flowtech Fluidpower stock has a trailing yield of around 5.7% on the current share price of £1.065. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
Check out our latest analysis for Flowtech Fluidpower
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. It paid out 80% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. 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. It distributed 37% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that Flowtech Fluidpower'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 the company's payout ratio, plus analyst estimates of its future dividends.
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. Flowtech Fluidpower's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 78% a year over the past five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Flowtech Fluidpower has delivered an average of 13% per year annual increase in its dividend, based on the past five years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Flowtech Fluidpower is already paying out 80% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.