Dividend Investors: Don't Be Too Quick To Buy PSC Insurance Group Limited (ASX:PSI) For Its Upcoming Dividend

PSC Insurance Group Limited (ASX:PSI) stock is about to trade ex-dividend in four days. This means that investors who purchase shares on or after the 9th of March will not receive the dividend, which will be paid on the 7th of April.

PSC Insurance Group's upcoming dividend is AU$0.04 a share, following on from the last 12 months, when the company distributed a total of AU$0.095 per share to shareholders. Looking at the last 12 months of distributions, PSC Insurance Group has a trailing yield of approximately 2.8% on its current stock price of A$3.37. 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.

See our latest analysis for PSC Insurance Group

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. PSC Insurance Group paid out 117% 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.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. PSC Insurance Group's earnings per share have fallen at approximately 14% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

PSC Insurance Group 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. It's hard to grow dividends per share when a company keeps creating new shares.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last five years, PSC Insurance Group has lifted its dividend by approximately 32% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. PSC Insurance Group is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Should investors buy PSC Insurance Group for the upcoming dividend? Earnings per share are in decline and PSC Insurance Group is paying out what we feel is an uncomfortably high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. This is not an overtly appealing combination of characteristics, and we're just not that interested in this company's dividend.

With that being said, if you're still considering PSC Insurance Group as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 5 warning signs for PSC Insurance Group you should know about.

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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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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