Don't Race Out To Buy Pernod Ricard SA (EPA:RI) 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 Pernod Ricard SA (EPA:RI) is about to trade ex-dividend in the next 3 days. The ex-dividend date is one business day 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase Pernod Ricard's shares before the 17th of July in order to be eligible for the dividend, which will be paid on the 19th of July.

The company's next dividend payment will be €2.35 per share. Last year, in total, the company distributed €4.70 to shareholders. Based on the last year's worth of payments, Pernod Ricard has a trailing yield of 3.8% on the current stock price of €130.20. 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.

See our latest analysis for Pernod Ricard

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 is paying out an acceptable 62% of its profit, a common payout level among most companies. 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. Pernod Ricard paid out more free cash flow than it generated - 156%, 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.

While Pernod Ricard's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Pernod Ricard to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Pernod Ricard earnings per share are up 6.4% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Pernod Ricard has delivered an average of 12% per year annual increase in its dividend, based on the past 10 years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Is Pernod Ricard an attractive dividend stock, or better left on the shelf? Earnings per share have grown somewhat, although Pernod Ricard paid out over half its profits and the dividend was not well covered by free cash flow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Pernod Ricard and want to know more, you'll find it very useful to know what risks this stock faces. Be aware that Pernod Ricard is showing 2 warning signs in our investment analysis, and 1 of those is potentially serious...

If you're in the market for strong dividend payers, we recommend checking 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com