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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 2 days. Investors can purchase shares before the 27th of June in order to be eligible for this dividend, which will be paid on the 15th of July.
PrairieSky Royalty’s next dividend payment will be CA$0.065 per share, and in the last 12 months, the company paid a total of CA$0.78 per share. Based on the last year’s worth of payments, PrairieSky Royalty stock has a trailing yield of around 4.3% on the current share price of CA$18.32. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! So we need to investigate whether PrairieSky Royalty can afford its dividend, and if the dividend could grow.
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. An unusually high payout ratio of 213% of its profit suggests something is happening other than the usual distribution of profits to shareholders. 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. It paid out 96% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings – expenses don’t pay themselves – so it’s not great to see it paying out so much of its cash flow.
Cash is slightly more important than profit from a dividend perspective, but given PrairieSky Royalty’s payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. So we’re not too excited that PrairieSky Royalty’s earnings are down 3.2% a year over the past five years.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. PrairieSky Royalty’s dividend payments per share have declined at 9.3% per year on average over the past 5 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
Should investors buy PrairieSky Royalty for the upcoming dividend? It’s looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (213%) and cash flow (96%) as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. It’s not an attractive combination from a dividend perspective, and we’re inclined to pass on this one for the time being.
Curious what other investors think of PrairieSky Royalty? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.