Do These 3 Checks Before Buying Freightways Group Limited (NZSE:FRW) For Its Upcoming Dividend

Readers hoping to buy Freightways Group Limited (NZSE:FRW) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase Freightways Group's shares on or after the 12th of September will not receive the dividend, which will be paid on the 1st of October.

The company's upcoming dividend is NZ$0.2235294 a share, following on from the last 12 months, when the company distributed a total of NZ$0.37 per share to shareholders. Based on the last year's worth of payments, Freightways Group stock has a trailing yield of around 4.0% on the current share price of NZ$9.35. 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 investigate whether Freightways Group can afford its dividend, and if the dividend could grow.

See our latest analysis for Freightways Group

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year Freightways Group paid out 93% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. Fortunately, it paid out only 46% of its free cash flow in the past year.

It's good to see that while Freightways Group'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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about Freightways Group's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

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, 10 years ago, Freightways Group has lifted its dividend by approximately 7.0% a year on average.

To Sum It Up

Is Freightways Group worth buying for its dividend? Earnings per share have been effectively flat, which is a bit of a concern given the company is paying out 93% of its profit as dividends, which we feel is uncomfortably high. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Freightways Group.

With that being said, if you're still considering Freightways Group as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 2 warning signs for Freightways Group 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.