Don't Race Out To Buy Perenti Global Limited (ASX:PRN) Just Because It's Going Ex-Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Perenti Global Limited (ASX:PRN) is about to trade ex-dividend in the next four days. You can purchase shares before the 16th of March in order to receive the dividend, which the company will pay on the 7th of April.

Perenti Global's next dividend payment will be AU$0.035 per share. Last year, in total, the company distributed AU$0.07 to shareholders. Based on the last year's worth of payments, Perenti Global stock has a trailing yield of around 6.5% on the current share price of A$1.085. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Perenti Global can afford its dividend, and if the dividend could grow.

See our latest analysis for Perenti Global

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Perenti Global's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If Perenti Global didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. It distributed 33% of its free cash flow as dividends, a comfortable payout level for most companies.

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. Perenti Global was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Perenti Global's dividend payments per share have declined at 4.4% per year on average over the past 10 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.

Get our latest analysis on Perenti Global's balance sheet health here.

To Sum It Up

Should investors buy Perenti Global for the upcoming dividend? It's hard to get used to Perenti Global paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not that we think Perenti Global is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Perenti Global and want to know more, you'll find it very useful to know what risks this stock faces. For example, Perenti Global has 4 warning signs (and 1 which is a bit concerning) we think 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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