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

Propel Funeral Partners Limited (ASX:PFP) is about to trade ex-dividend in the next day or two. The ex-dividend date is commonly two business days 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 important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Thus, you can purchase Propel Funeral Partners' shares before the 1st of September in order to receive the dividend, which the company will pay on the 2nd of October.

The company's next dividend payment will be AU$0.07 per share. Last year, in total, the company distributed AU$0.14 to shareholders. Last year's total dividend payments show that Propel Funeral Partners has a trailing yield of 2.8% on the current share price of AU$5.18. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

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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. Propel Funeral Partners paid out 97% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the past year it paid out 141% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cash is slightly more important than profit from a dividend perspective, but given Propel Funeral Partners's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

See our latest analysis for Propel Funeral Partners

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. With that in mind, we're encouraged by the steady growth at Propel Funeral Partners, with earnings per share up 6.5% on average over the last five years. Earnings per share have been growing comfortably, although unfortunately the company is paying out more of its profits than we're comfortable with over the long term.

We'd also point out that Propel Funeral Partners issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last seven years, Propel Funeral Partners has lifted its dividend by approximately 12% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

From a dividend perspective, should investors buy or avoid Propel Funeral Partners? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that being said, if you're still considering Propel Funeral Partners as an investment, you'll find it beneficial to know what risks this stock is facing. Case in point: We've spotted 1 warning sign for Propel Funeral Partners you should be aware of.

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.