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Freehold Royalties Ltd. (TSE:FRU) stock is about to trade ex-dividend in four days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Therefore, if you purchase Freehold Royalties' shares on or after the 28th of September, you won't be eligible to receive the dividend, when it is paid on the 16th of October.
The company's upcoming dividend is CA$0.09 a share, following on from the last 12 months, when the company distributed a total of CA$1.08 per share to shareholders. Based on the last year's worth of payments, Freehold Royalties stock has a trailing yield of around 7.2% on the current share price of CA$15.01. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Freehold Royalties can afford its dividend, and if the dividend could grow.
See our latest analysis for Freehold Royalties
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year, Freehold Royalties paid out 101% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Freehold Royalties paid out more free cash flow than it generated - 162%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
As Freehold Royalties's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. 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 59% per annum for the past five years. Freehold Royalties's dividend was not well covered by earnings, although at least its earnings per share are growing quickly. Generally, when a company is growing this quickly and paying out all of its earnings as dividends, it can suggest either that the company is borrowing heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.