The board of PrairieSky Royalty Ltd. (TSE:PSK) has announced that it will pay a dividend on the 15th of July, with investors receiving CA$0.065 per share. The dividend yield is 1.9% based on this payment, which is a little bit low compared to the other companies in the industry.
PrairieSky Royalty's Dividend Is Well Covered By Earnings
The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Before making this announcement, PrairieSky Royalty's dividend was higher than its profits, but the free cash flows quite comfortably covered it. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.
The next year is set to see EPS grow by 120.3%. If the dividend continues along recent trends, we estimate the payout ratio will be 50%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
PrairieSky Royalty Is Still Building Its Track Record
Over the last 7, we have seen a slow decline in the dividend payments. We would therefore be careful about how the payment would fair in all economic conditions. The dividend has gone from CA$1.27 in 2014 to the most recent annual payment of CA$0.26. This works out to a decline of approximately 80% over that time. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.
Dividend Growth May Be Hard To Come By
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. PrairieSky Royalty has seen earnings per share falling at 7.7% per year over the last five years. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.
PrairieSky Royalty's Dividend Doesn't Look Sustainable
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We would probably look elsewhere for an income investment.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 2 warning signs for PrairieSky Royalty that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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