The board of Fraser and Neave, Limited (SGX:F99) has announced that it will pay a dividend of SGD0.04 per share on the 16th of February. This means the dividend yield will be fairly typical at 5.2%.

Check out our latest analysis for Fraser and Neave

Fraser and Neave's Earnings Easily Cover The Distributions

We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, Fraser and Neave was quite comfortably covering its dividend with earnings and it was paying more than 75% of its free cash flow to shareholders. By paying out so much of its cash flows, this could indicate that the company has limited opportunities for investment and growth.

If the trend of the last few years continues, EPS will grow by 1.4% over the next 12 months. Assuming the dividend continues along recent trends, we think the payout ratio could be 52% by next year, which is in a pretty sustainable range.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2014, the annual payment back then was SGD0.155, compared to the most recent full-year payment of SGD0.055. Doing the maths, this is a decline of about 9.8% per year. A company that decreases its dividend over time generally isn't what we are looking for.

Fraser and Neave May Find It Hard To Grow The Dividend

Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. Although it's important to note that Fraser and Neave's earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time. Fraser and Neave is struggling to find viable investments, so it is returning more to shareholders. This isn't necessarily bad, but we wouldn't expect rapid dividend growth in the future.

Our Thoughts On Fraser and Neave's Dividend

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. While Fraser and Neave is earning enough to cover the dividend, we are generally unimpressed with its future prospects. This company is not in the top tier of income providing stocks.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 2 warning signs for Fraser and Neave (1 is a bit concerning!) that you should be aware of before investing. Is Fraser and Neave not quite the opportunity you were looking for? Why not check out our selection of top 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.