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

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3 days ago

Freehold Royalties Ltd. (TSE:FRU) has announced that it will pay a dividend of CA$0.09 per share on the 15th of August. This means the annual payment is 8.2% of the current stock price, which is above the average for the industry.
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Estimates Indicate Freehold Royalties' Could Struggle to Maintain Dividend Payments In The Future
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before this announcement, Freehold Royalties was paying out 109% of what it was earning, and not generating any free cash flows either. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.
Looking forward, earnings per share is forecast to fall by 22.4% over the next year. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 147%, which is definitely a bit high to be sustainable going forward.
See our latest analysis for Freehold Royalties
Dividend Volatility
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2015, the dividend has gone from CA$1.68 total annually to CA$1.08. Doing the maths, this is a decline of about 4.3% per year. 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
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's encouraging to see that Freehold Royalties has been growing its earnings per share at 102% a year over the past five years. Although earnings per share is up nicely Freehold Royalties is paying out 109% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.
Freehold Royalties' Dividend Doesn't Look Sustainable
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Freehold Royalties' payments, as there could be some issues with sustaining them into the future. 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.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. 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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