Freehold Royalties (TSE:FRU) Is Paying Out A Dividend Of CA$0.09

Freehold Royalties Ltd.'s (TSE:FRU) investors are due to receive a payment of CA$0.09 per share on 15th of May. This means the annual payment is 7.6% of the current stock price, which is above the average for the industry.

View our latest analysis for Freehold Royalties

Freehold Royalties' Earnings Easily Cover The Distributions

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, the company was paying out 123% of what it was earning and 79% of cash flows. This indicates that the company could be more focused on returning cash to shareholders than reinvesting to grow the business.

Over the next year, EPS is forecast to expand by 148.9%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 45% which would be quite comfortable going to take the dividend forward.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend 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. The dividend has shrunk at around 4.3% a year during that period. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

Freehold Royalties Might Find It Hard To Grow Its Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Freehold Royalties has impressed us by growing EPS at 49% per 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.

Freehold Royalties' Dividend Doesn't Look Sustainable

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. Overall, we don't think this company has the makings of a good income stock.

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. Taking the debate a bit further, we've identified 1 warning sign for Freehold Royalties that investors need to be conscious of moving forward. 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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