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Freehold Royalties Ltd.'s (TSE:FRU) investors are due to receive a payment of CA$0.09 per share on 15th of November. The dividend yield will be 7.2% based on this payment which is still above the industry average.
See our latest analysis for Freehold Royalties
Freehold Royalties Is Paying Out More Than It Is Earning
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before making this announcement, the company's dividend was much higher than its earnings. This situation certainly isn't ideal, and could place significant strain on the balance sheet if it continues.
EPS is set to fall by 9.5% over the next 12 months. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 99%, which could put the dividend under pressure if earnings don't start to improve.
Freehold Royalties' Track Record Isn't Great
The dividend hasn't seen any major cuts in the last 10 years, but it has slowly been decreasing. Since 2013, the annual payment back then was CA$1.68, compared to the most recent full-year payment of CA$1.08. Doing the maths, this is a decline of about 4.3% per year. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.
Freehold Royalties Might Find It Hard To Grow Its Dividend
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. We are encouraged to see that Freehold Royalties has grown earnings per share at 132% per year over the past five years. Although earnings per share is up nicely Freehold Royalties is paying out 101% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.
The Dividend Could Prove To Be Unreliable
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. Although they have been consistent in the past, we think the payments are a little high to be sustained. We would probably look elsewhere for an income investment.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 2 warning signs for Freehold Royalties that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.