Why You Should Leave PrairieSky Royalty Ltd. (TSE:PSK)'s Upcoming Dividend On The Shelf
PrairieSky Royalty Ltd. (TSE:PSK) stock is about to trade ex-dividend in 4 days time. This means that investors who purchase shares on or after the 30th of January will not receive the dividend, which will be paid on the 18th of February.
PrairieSky Royalty's upcoming dividend is CA$0.065 a share, following on from the last 12 months, when the company distributed a total of CA$0.78 per share to shareholders. Last year's total dividend payments show that PrairieSky Royalty has a trailing yield of 5.2% on the current share price of CA$14.88. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether PrairieSky Royalty has been able to grow its dividends, or if the dividend might be cut.
See our latest analysis for PrairieSky Royalty
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. PrairieSky Royalty distributed an unsustainably high 196% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. The company paid out 91% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.
Cash is slightly more important than profit from a dividend perspective, but given PrairieSky Royalty'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.
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 fall far enough, the company could be forced to cut its dividend. It's not encouraging to see that PrairieSky Royalty's earnings are effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. PrairieSky Royalty has seen its dividend decline 7.8% per annum on average over the past six years, which is not great to see.
The Bottom Line
Should investors buy PrairieSky Royalty for the upcoming dividend? It's been unable to generate earnings growth, yet is paying out an uncomfortably high percentage of both its profits (196%) and cash flow (91%) as dividends. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of PrairieSky Royalty.
Wondering what the future holds for PrairieSky Royalty? See what the four analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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