Don’t Race Out To Buy PrairieSky Royalty Ltd. (TSE:PSK) Just Because It’s Going Ex-Dividend

PrairieSky Royalty Ltd. (TSE:PSK) stock is about to trade ex-dividend in 4 days time. Ex-dividend means that investors that purchase the stock on or after the 30th of January will not receive this dividend, which will be paid on the 18th of February.

PrairieSky Royalty’s next dividend payment will be CA$0.065 per share, and in the last 12 months, the company paid a total of CA$0.78 per share. Calculating the last year’s worth of payments shows that PrairieSky Royalty has a trailing yield of 5.2% on the current share price of CA$14.88. If you buy this business for its dividend, you should have an idea of whether PrairieSky Royalty’s dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

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 extenuating circumstances, we’d consider the dividend at risk of a cut. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. 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.

As PrairieSky Royalty’s dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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

TSX:PSK Historical Dividend Yield, January 24th 2020
TSX:PSK Historical Dividend Yield, January 24th 2020

Have Earnings And Dividends Been Growing?

Companies that aren’t growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we’re not enthused to see that PrairieSky Royalty’s earnings per share have remained effectively flat over the past five years. It’s better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. PrairieSky Royalty’s dividend payments per share have declined at 7.8% per year on average over the past six years, which is uninspiring.

The Bottom Line

Is PrairieSky Royalty worth buying for its dividend? Not only are earnings per share flat, but PrairieSky Royalty is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. It’s not the most attractive proposition from a dividend perspective, and we’d probably give this one a miss for now.

Ever wonder 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

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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