Stock Analysis

Here's Why We're Wary Of Buying Perpetual's (ASX:PPT) For Its Upcoming Dividend

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ASX:PPT
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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 Perpetual Limited (ASX:PPT) is about to go ex-dividend in just 4 days. You can purchase shares before the 4th of March in order to receive the dividend, which the company will pay on the 26th of March.

Perpetual's upcoming dividend is AU$0.84 a share, following on from the last 12 months, when the company distributed a total of AU$1.34 per share to shareholders. Looking at the last 12 months of distributions, Perpetual has a trailing yield of approximately 4.4% on its current stock price of A$30.66. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Perpetual

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Perpetual paid out 113% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance.

When a company pays out a dividend that is not well covered by profits, the dividend is generally seen as more vulnerable to being cut.

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

historic-dividend
ASX:PPT Historic Dividend February 27th 2021

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Perpetual's earnings per share have dropped 15% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Perpetual also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Perpetual's dividend payments per share have declined at 4.4% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Final Takeaway

Should investors buy Perpetual for the upcoming dividend? Not only are earnings per share shrinking, but Perpetual is paying out a disconcertingly high percentage of its profit as dividends. It's not that we hate the business, but we feel that these characeristics are not desirable for investors seeking a reliable dividend stock to own for the long term. All things considered, we're not optimistic about its dividend prospects, and would be inclined to leave it on the shelf for now.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Perpetual. For example - Perpetual has 3 warning signs we think you should be aware of.

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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