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Freehold Royalties Ltd. (TSE:FRU) has announced that it will pay a dividend of CA$0.09 per share on the 16th of June. This makes the dividend yield 8.8%, which will augment investor returns quite nicely.
Freehold Royalties' Future Dividends May Potentially Be At Risk
A big dividend yield for a few years doesn't mean much if it can't be sustained. Based on the last payment, earnings were actually smaller than the dividend, and the company was actually spending more cash than it was making. Paying out such a large dividend compared to earnings while also not generating any free cash flow would definitely be difficult to keep up.
EPS is set to fall by 24.5% over the next 12 months. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 149%, which could put the dividend under pressure if earnings don't start to improve.
Check out our latest analysis for Freehold Royalties
Dividend Volatility
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The dividend has gone from an annual total of CA$1.68 in 2015 to the most recent total annual payment of CA$1.08. This works out to be a decline of approximately 4.3% per year over that time. A company that decreases its dividend over time generally isn't what we are looking for.
Freehold Royalties' Dividend Might Lack Growth
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Freehold Royalties has seen EPS rising for the last five years, at 102% per annum. Strong earnings is nice to see, but unless this can be sustained on minimal reinvestment of profits, we would question whether dividends will follow suit.
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. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. We don't think Freehold Royalties is a great stock to add to your portfolio if income is your focus.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 1 warning sign for Freehold Royalties that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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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.