Why It Might Not Make Sense To Buy PrairieSky Royalty Ltd. (TSE:PSK) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see PrairieSky Royalty Ltd. (TSE:PSK) is about to trade ex-dividend in the next four days. This means that investors who purchase shares on or after the 29th of June will not receive the dividend, which will be paid on the 15th of July.

PrairieSky Royalty's next dividend payment will be CA$0.06 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 2.7% on the current share price of CA$9.05. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for PrairieSky Royalty

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. PrairieSky Royalty distributed an unsustainably high 194% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether PrairieSky Royalty generated enough free cash flow to afford its dividend. Over the last year, it paid out more than three-quarters (85%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and PrairieSky Royalty fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. PrairieSky Royalty's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 33% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. PrairieSky Royalty's dividend payments per share have declined at 24% per year on average over the past six years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

The Bottom Line

Is PrairieSky Royalty worth buying for its dividend? Earnings per share have been shrinking in recent times. Additionally, PrairieSky Royalty is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not that we think PrairieSky Royalty is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in PrairieSky Royalty despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 3 warning signs with PrairieSky Royalty (at least 2 which are a bit unpleasant), and understanding them should be part of your investment process.

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.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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