Do These 3 Checks Before Buying Propel Funeral Partners Limited …

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Propel Funeral Partners Limited (ASX:PFP) stock is about to trade ex-dividend in 2 days time. If you purchase the stock on or after the 5th of March, you won’t be eligible to receive this dividend, when it is paid on the 6th of April.

Propel Funeral Partners’s upcoming dividend is AU$0.04 a share, following on from the last 12 months, when the company distributed a total of AU$0.12 per share to shareholders. Looking at the last 12 months of distributions, Propel Funeral Partners has a trailing yield of approximately 3.4% on its current stock price of A$3.4. If you buy this business for its dividend, you should have an idea of whether Propel Funeral Partners’s dividend is reliable and sustainable. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Propel Funeral Partners

If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Propel Funeral Partners distributed an unsustainably high 122% of its profit as dividends to shareholders last year. Without extenuating circumstances, we’d consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Propel Funeral Partners generated enough free cash flow to afford its dividend. Over the past year it paid out 152% of its free cash flow as dividends, which is uncomfortably high. We’re curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cash is slightly more important than profit from a dividend perspective, but given Propel Funeral Partners’s payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

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

ASX:PFP Historical Dividend Yield, March 1st 2020

ASX:PFP Historical Dividend Yield, March 1st 2020

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For that reason, it’s encouraging to see Propel Funeral Partners’s earnings over the past year have risen 148%. While we’d be remiss not to point out that a year is a very short time in dividend investing, it’s an encouraging sign so far. Earnings per share are increasing at a rapid rate, but the company is paying out more than we think is sustainable, based on current earnings. Generally, when a company is paying out more than it earned as dividends, it could signal either that the company is spending heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.

One year is not very long in the grand scheme of things though, so we wouldn’t draw too strong a conclusion based on these results.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, two years ago, Propel Funeral Partners has lifted its dividend by approximately 35% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

To Sum It Up

Is Propel Funeral Partners worth buying for its dividend? While it’s nice to see earnings per share growing, we’re curious about how Propel Funeral Partners intends to continue growing, or maintain the dividend in a downturn given that it’s paying out such a high percentage of its earnings and cashflow. Bottom line: Propel Funeral Partners has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Ever wonder what the future holds for Propel Funeral Partners? See what the two analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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