Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Freehold Royalties Ltd. (TSE:FRU) is about to trade ex-dividend in the next 3 days. You can purchase shares before the 30th of December in order to receive the dividend, which the company will pay on the 15th of January.
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. Last year's total dividend payments show that Freehold Royalties has a trailing yield of 4.6% on the current share price of CA$5.2. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
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 lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. With the recent loss, it's important to check if the business generated enough cash to pay its 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.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. 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 16% per year on average over the past 10 years, which is uninspiring.
Remember, you can always get a snapshot of Freehold Royalties's financial health, by checking our visualisation of its financial health, here.
To Sum It Up
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. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
If you want to look further into Freehold Royalties, it's worth knowing the risks this business faces. In terms of investment risks, we've identified 2 warning signs with Freehold Royalties and understanding them should be part of your investment process.
If you're in the market for dividend stocks, we recommend checking our list of top 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.
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