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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 four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase Freehold Royalties' shares before the 29th of November in order to receive the dividend, which the company will pay on the 16th of December.
The company's next dividend payment will be CA$0.09 per share, and in the last 12 months, the company paid a total of CA$1.08 per share. Based on the last year's worth of payments, Freehold Royalties has a trailing yield of 7.5% on the current stock price of CA$14.44. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Check out our latest analysis for Freehold Royalties
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Freehold Royalties distributed an unsustainably high 123% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Freehold Royalties paid out more free cash flow than it generated - 166%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Cash is slightly more important than profit from a dividend perspective, but given Freehold Royalties's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see Freehold Royalties's earnings have been skyrocketing, up 49% per annum for the past five years. Earnings per share are increasing at a rapid rate, but the company is paying out more than we think is sustainable, based on current earnings. Companies that pay out more than they earned while growing rapidly, can find themselves short of cash in a few years when growth slows.