A&W Revenue Royalties Income Fund (TSE:AW.UN) is about to trade ex-dividend in the next 2 days. If you purchase the stock on or after the 14th of October, you won't be eligible to receive this dividend, when it is paid on the 30th of October.
A&W Revenue Royalties Income Fund's next dividend payment will be CA$0.10 per share, on the back of last year when the company paid a total of CA$1.20 to shareholders. Based on the last year's worth of payments, A&W Revenue Royalties Income Fund has a trailing yield of 4.3% on the current stock price of CA$27.65. 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 out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Its dividend payout ratio is 85% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be worried about the risk of a drop in earnings. A useful secondary check can be to evaluate whether A&W Revenue Royalties Income Fund generated enough free cash flow to afford its dividend. Over the last year, it paid out more than three-quarters (88%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.
It's positive to see that A&W Revenue Royalties Income Fund's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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. With that in mind, we're encouraged by the steady growth at A&W Revenue Royalties Income Fund, with earnings per share up 6.3% on average over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. A&W Revenue Royalties Income Fund has seen its dividend decline 2.0% per annum on average over the past 10 years, which is not great to see. A&W Revenue Royalties Income Fund is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
Should investors buy A&W Revenue Royalties Income Fund for the upcoming dividend? Earnings per share have been growing modestly and A&W Revenue Royalties Income Fund paid out a bit over half of its earnings and free cash flow last year. All things considered, we are not particularly enthused about A&W Revenue Royalties Income Fund from a dividend perspective.
So if you want to do more digging on A&W Revenue Royalties Income Fund, you'll find it worthwhile knowing the risks that this stock faces. For example, we've found 1 warning sign for A&W Revenue Royalties Income Fund that we recommend you consider before investing in the business.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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