Today we’ll take a closer look at Future Lifestyle Fashions Limited (NSE:FLFL) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
Investors might not know much about Future Lifestyle Fashions’s dividend prospects, even though it has been paying dividends for the last five years and offers a 0.3% yield. While the yield may not look too great, the relatively long payment history is interesting. Some simple research can reduce the risk of buying Future Lifestyle Fashions for its dividend – read on to learn more.
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Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Future Lifestyle Fashions paid out 17% of its profit as dividends, over the trailing twelve month period. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Future Lifestyle Fashions’s cash payout ratio last year was 9.0%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Is Future Lifestyle Fashions’s Balance Sheet Risky?
As Future Lifestyle Fashions has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). Future Lifestyle Fashions has net debt of 0.92 times its EBITDA, which we think is not too troublesome.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. With EBIT of 2.55 times its interest expense, Future Lifestyle Fashions’s interest cover is starting to look a bit thin.
Remember, you can always get a snapshot of Future Lifestyle Fashions’s latest financial position, by checking our visualisation of its financial health.
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. Looking at the data, we can see that Future Lifestyle Fashions has been paying a dividend for the past five years. During the past five-year period, the first annual payment was ₹0.40 in 2015, compared to ₹1.40 last year. This works out to be a compound annual growth rate (CAGR) of approximately 28% a year over that time.
We’re not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend’s purchasing power over the long term. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Future Lifestyle Fashions has grown its earnings per share at 41% per annum over the past five years. The company is only paying out a fraction of its earnings as dividends, and in the past been able to use the retained earnings to grow its profits rapidly – an ideal combination.
We’d also point out that Future Lifestyle Fashions issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental – it’s hard to grow dividends per share when new shares are regularly being created.
To summarise, shareholders should always check that Future Lifestyle Fashions’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It’s great to see that Future Lifestyle Fashions is paying out a low percentage of its earnings and cash flow. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we’d like. Future Lifestyle Fashions performs highly under this analysis, although it falls slightly short of our exacting standards. At the right valuation, it could be a solid dividend prospect.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 6 Future Lifestyle Fashions analysts we track are forecasting continued growth with our free report on analyst estimates for the company.