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Freehold Royalties Ltd.'s (TSE:FRU) investors are due to receive a payment of CA$0.09 per share on 16th of December. This means the annual payment is 7.8% of the current stock price, which is above the average for the industry.
View our latest analysis for Freehold Royalties
Freehold Royalties' Future Dividend Projections Appear Well Covered By Earnings
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, the company's dividend was much higher than its earnings. Without profits and cash flows increasing, it would be difficult for the company to continue paying the dividend at this level.
Earnings per share is forecast to rise by 26.7% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could reach 91%, which is on the higher side, but certainly still feasible.
Dividend Volatility
Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2014, the annual payment back then was CA$1.68, compared to the most recent full-year 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.
Dividend Growth Could Be Constrained
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. It's encouraging to see that Freehold Royalties has been growing its earnings per share at 46% a year over the past five years. While EPS is growing rapidly, Freehold Royalties paid out a very high 123% of its income as dividends. If earnings continue to grow, this dividend may be sustainable, but we think a payout this high definitely bears watching.
The Dividend Could Prove To Be Unreliable
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. 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. This company is not in the top tier of income providing stocks.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 2 warning signs for Freehold Royalties that investors should know about before committing capital to this stock. Is Freehold Royalties not quite the opportunity you were looking for? Why not check out our selection of top 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.