Don't Buy Frasers Property Limited (SGX:TQ5) For Its Next Dividend Without Doing These Checks

Frasers Property Limited (SGX:TQ5) stock is about to trade ex-dividend in three days. 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 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. Thus, you can purchase Frasers Property's shares before the 23rd of January in order to receive the dividend, which the company will pay on the 14th of February.

The company's next dividend payment will be S$0.045 per share, on the back of last year when the company paid a total of S$0.045 to shareholders. Calculating the last year's worth of payments shows that Frasers Property has a trailing yield of 4.8% on the current share price of S$0.93. 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 Frasers Property can afford its dividend, and if the dividend could grow.

View our latest analysis for Frasers Property

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Frasers Property paid out 108% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 15% of its cash flow last year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Frasers Property fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Frasers Property's earnings per share have dropped 24% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Frasers Property has seen its dividend decline 0.6% per annum on average over the past 10 years, which is not great to see.

The Bottom Line

Is Frasers Property worth buying for its dividend? It's never great to see earnings per share declining, especially when a company is paying out 108% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Frasers Property's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think Frasers Property is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Frasers Property. Be aware that Frasers Property is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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.