Don't Buy Pernod Ricard SA (EPA:RI) For Its Next Dividend Without Doing These Checks

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Pernod Ricard SA (EPA:RI) is about to go ex-dividend in just three days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Therefore, if you purchase Pernod Ricard's shares on or after the 23rd of July, you won't be eligible to receive the dividend, when it is paid on the 25th of July.

The company's upcoming dividend is €2.35 a share, following on from the last 12 months, when the company distributed a total of €4.70 per share to shareholders. Based on the last year's worth of payments, Pernod Ricard stock has a trailing yield of around 5.0% on the current share price of €94.22. If you buy this business for its dividend, you should have an idea of whether Pernod Ricard's dividend is reliable and sustainable. As a result, readers should always check whether Pernod Ricard has been able to grow its dividends, or if the dividend might be cut.

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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. Pernod Ricard paid out 108% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Pernod Ricard generated enough free cash flow to afford its dividend. Pernod Ricard paid out more free cash flow than it generated - 110%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

As Pernod Ricard's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Check out our latest analysis for Pernod Ricard

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. 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 Pernod Ricard's earnings are down 4.6% 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. In the last 10 years, Pernod Ricard has lifted its dividend by approximately 11% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Pernod Ricard is already paying out 108% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

From a dividend perspective, should investors buy or avoid Pernod Ricard? Not only are earnings per share declining, but Pernod Ricard is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders 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. Bottom line: Pernod Ricard has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Pernod Ricard as an investment, you'll find it beneficial to know what risks this stock is facing. Be aware that Pernod Ricard is showing 4 warning signs in our investment analysis, and 2 of those don't sit too well with us...

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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.