Here's Why We're Wary Of Buying Freehold Royalties' (TSE:FRU) For Its Upcoming Dividend
It looks like Freehold Royalties Ltd. (TSE:FRU) is about to go ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 28th of August will not receive the dividend, which will be paid on the 15th of September.
Freehold Royalties's next dividend payment will be CA$0.015 per share. Last year, in total, the company distributed CA$0.18 to shareholders. Looking at the last 12 months of distributions, Freehold Royalties has a trailing yield of approximately 4.1% on its current stock price of CA$4.38. 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.
See 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 reported a loss last year, so it's not great to see that it has continued paying a dividend. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Freehold Royalties didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. It paid out 84% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.
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. Freehold Royalties reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.
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 19% per year on average over the past 10 years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
We update our analysis on Freehold Royalties every 24 hours, so you can always get the latest insights on its financial health, here.
Final Takeaway
From a dividend perspective, should investors buy or avoid Freehold Royalties? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. It's not that we think Freehold Royalties is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Although, if you're still interested in Freehold Royalties and want to know more, you'll find it very useful to know what risks this stock faces. For example, Freehold Royalties has 2 warning signs (and 1 which is a bit concerning) we think you should know about.
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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