Here's Why We're Wary Of Buying Propel Funeral Partners' (ASX:PFP) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Propel Funeral Partners Limited (ASX:PFP) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Thus, you can purchase Propel Funeral Partners' shares before the 4th of March in order to receive the dividend, which the company will pay on the 5th of April.

The company's upcoming dividend is AU$0.072 a share, following on from the last 12 months, when the company distributed a total of AU$0.14 per share to shareholders. Last year's total dividend payments show that Propel Funeral Partners has a trailing yield of 2.5% on the current share price of AU$5.59. If you buy this business for its dividend, you should have an idea of whether Propel Funeral Partners's dividend is reliable and sustainable. As a result, readers should always check whether Propel Funeral Partners has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Propel Funeral Partners

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Propel Funeral Partners paid out 98% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Propel Funeral Partners generated enough free cash flow to afford its dividend. It paid out 86% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's good to see that while Propel Funeral Partners's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's not encouraging to see that Propel Funeral Partners's earnings are effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, six years ago, Propel Funeral Partners has lifted its dividend by approximately 14% a year on average.

The Bottom Line

Is Propel Funeral Partners worth buying for its dividend? Earnings per share have barely moved in recent times, and the company is paying out an uncomfortably high percentage of its income. Fortunately its cash generation was somewhat stronger. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Propel Funeral Partners.

With that in mind though, if the poor dividend characteristics of Propel Funeral Partners don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 2 warning signs for Propel Funeral Partners (of which 1 is concerning!) you should know about.

If you're in the market for strong dividend payers, we recommend checking 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.