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Don't Race Out To Buy Freehold Royalties Ltd. (TSE:FRU) Just Because It's Going Ex-Dividend

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Simply Wall St
·3 min read
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Freehold Royalties Ltd. (TSE:FRU) stock is about to trade ex-dividend in four days. Investors can purchase shares before the 25th of February in order to be eligible for this dividend, which will be paid on the 15th of March.

Freehold Royalties's next dividend payment will be CA$0.02 per share, and in the last 12 months, the company paid a total of CA$0.18 per share. Based on the last year's worth of payments, Freehold Royalties stock has a trailing yield of around 3.6% on the current share price of CA$6.68. 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 investigate whether Freehold Royalties can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Freehold Royalties

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. Freehold Royalties paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Over the last year, it paid out more than three-quarters (86%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Freehold Royalties reported a loss last year, but at least the general trend suggests its income has been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Freehold Royalties's dividend payments per share have declined at 17% per year on average over the past 10 years, which is uninspiring.

Get our latest analysis on Freehold Royalties's balance sheet health here.

Final Takeaway

From a dividend perspective, should investors buy or avoid Freehold Royalties? It's hard to get used to Freehold Royalties paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. In summary, it's hard to get excited about Freehold Royalties from a dividend perspective.

So if you want to do more digging on Freehold Royalties, you'll find it worthwhile knowing the risks that this stock faces. To help with this, we've discovered 3 warning signs for Freehold Royalties that you should be aware of before investing in their shares.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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. 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.

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