Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that PetMed Express, Inc. (NASDAQ:PETS) is about to go ex-dividend in just 3 days. You will need to purchase shares before the 1st of August to receive the dividend, which will be paid on the 9th of August.
PetMed Express’s upcoming dividend is US$0.27 a share, following on from the last 12 months, when the company distributed a total of US$1.08 per share to shareholders. Looking at the last 12 months of distributions, PetMed Express has a trailing yield of approximately 6.8% on its current stock price of $15.98. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it’s growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. PetMed Express is paying out an acceptable 72% of its profit, a common payout level among most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. The company paid out 99% 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.
While PetMed Express’s dividends were covered by the company’s reported profits, cash is somewhat more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to PetMed Express’s ability to maintain its dividend.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we’re glad to see PetMed Express’s earnings per share have risen 11% per annum over the last five years. Earnings have been growing at a decent rate, but we’re concerned dividend payments consumed most of the company’s cash flow over the past year.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. PetMed Express has delivered an average of 10% per year annual increase in its dividend, based on the past 10 years of dividend payments. It’s great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
Should investors buy PetMed Express for the upcoming dividend? The best dividend stocks typically boast a long history of growing earnings per share (EPS) via a combination of earnings growth and buybacks. That’s why we’re glad to see PetMed Express growing its EPS, buying back stock and paying out a reasonable percentage of its earnings as dividends. However, we note with some concern that it paid out 99% of its free cash flow last year, which is uncomfortably high and makes us wonder why the company chose to spend even more cash on buybacks. All things considered, we are not particularly enthused about PetMed Express from a dividend perspective.
Wondering what the future holds for PetMed Express? See what the three 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.
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