PrairieSky Royalty's (TSE:PSK) Dividend Will Be Increased To CA$0.12

The board of PrairieSky Royalty Ltd. (TSE:PSK) has announced that it will be increasing its dividend on the 14th of April to CA$0.12. This takes the annual payment to 2.1% of the current stock price, which unfortunately is below what the industry is paying.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that PrairieSky Royalty's stock price has increased by 32% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

See our latest analysis for PrairieSky Royalty

PrairieSky Royalty's Payment Has Solid Earnings Coverage

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Prior to this announcement, PrairieSky Royalty's earnings easily covered the dividend, but free cash flows were negative. Since a dividend means the company is paying out cash to investors, this could prove to be a problem in the future.

Over the next year, EPS is forecast to fall by 7.6%. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 60%, which is comfortable for the company to continue in the future.

PrairieSky Royalty Doesn't Have A Long Payment History

It's nice to see that PrairieSky Royalty has been paying a dividend for a number of years now, however it has been cut at least once in that time. This isn't what income investors are looking for, as cuts in the past can be a good indicator that the company might cut in the future. The dividend has gone from CA$1.27 in 2014 to the most recent annual payment of CA$0.48. Dividend payments have fallen sharply, down 62% over that time. A company that decreases its dividend over time generally isn't what we are looking for.

The Dividend Looks Likely To Grow

Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. We are encouraged to see that PrairieSky Royalty has grown earnings per share at 43% per year over the past five years. The company's earnings per share has grown rapidly in recent years, and it has a good balance between reinvesting and paying dividends to shareholders, so we think that PrairieSky Royalty could prove to be a strong dividend payer.

Our Thoughts On PrairieSky Royalty's Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think PrairieSky Royalty is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, PrairieSky Royalty has 5 warning signs (and 2 which are significant) we think you should know about. Is PrairieSky Royalty not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.