Just four days left to collect Freightways dividend (NZSE:FRE)

Readers hoping to buy Freightways Limited (NZSE:FRE) for its dividend will have to come shortly, as the stock is set to trade ex-dividend. The ex-dividend date is one business day before the record date, which is the latest date by which shareholders must be present on the books of the company to be eligible for payment of a dividend. The ex-dividend date is important because any stock transaction must have settled before the record date to be eligible for a dividend. In other words, investors can buy shares of Freightways before March 10 in order to be eligible for the dividend, which will be paid on April 1.

The company’s next dividend payment will be NZ$0.21 per share, following last year when the company paid a total of NZ$0.36 to shareholders. Looking at the last 12 months of distributions, Freightways has a yield of around 2.9% on its current share price of NZ$12.2. We love to see companies pay out a dividend, but it’s also important to make sure that laying the golden eggs doesn’t kill our golden hen! So we need to consider if Freightways can afford its dividend and if the dividend could go up.

See our latest analysis for Freightways

Dividends are usually paid out of company profits, so if a company pays out more than it has earned, its dividend is usually at risk of being reduced. It paid out 83% of its earnings as dividends last year, which isn’t unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a downturn in activity. We would be concerned if earnings started to decline. That said, even very profitable companies can sometimes not generate enough cash to pay the dividend, so we should always check if the dividend is covered by cash flow. Dividends consumed 57% of the company’s free cash flow last year, which is within a normal range for most dividend-paying organizations.

It is encouraging to see that the dividend is covered by both earnings and cash flow. This generally suggests that the dividend is sustainable, as long as earnings don’t drop precipitously.

Click here to see the company’s payout ratio, as well as analysts’ estimates of its future dividends.


Have earnings and dividends increased?

Companies with strong growth prospects are generally the best dividend payers because it is easier to increase dividends when earnings per share improve. If earnings fall enough, the company could be forced to cut its dividend. With this in mind, we are encouraged by the steady growth of Freightways, with earnings per share up 6.1% on average over the past five years. The decent historic growth in earnings per share suggests that Freightways has indeed increased shareholder value. However, it now pays more than half of its profits in the form of dividends. If management raises the payout ratio further, we’ll take that as a tacit signal that the company’s growth prospects are slowing.

Another key way to gauge a company’s dividend outlook is to measure its historical rate of dividend growth. Over the past 10 years, Freightways has increased its dividend by around 9.7% per year on average. We are pleased to see dividends increasing alongside earnings over several years, which may be a sign that the company intends to share the growth with shareholders.

Last takeaway

Is Freightways an attractive dividend stock, or is it best left on the shelf? Earnings per share rose modestly and Freightways paid out just over half of its earnings and free cash flow last year. To summarize, Freightways seems correct on this analysis, even if it does not seem like a remarkable opportunity.

While you’re not too concerned about Freightways’ ability to pay dividends, you should still keep in mind some of the other risks this company faces. Example: we have identified 2 warning signs for Freightways you should be aware.

A common investment mistake is to buy the first good stock you see. Here you can find a complete list of high yielding dividend stocks.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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