Here's Why We're Wary Of Buying Persimmon's (LON:PSN) For Its Upcoming Dividend

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 Persimmon Plc (LON:PSN) is about to go ex-dividend in just four days. Ex-dividend means that investors that purchase the stock on or after the 11th of March will not receive this dividend, which will be paid on the 26th of March.

Persimmon's next dividend payment will be UK£1.25 per share, and in the last 12 months, the company paid a total of UK£1.40 per share. Calculating the last year's worth of payments shows that Persimmon has a trailing yield of 8.1% on the current share price of £29.06. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Persimmon can afford its dividend, and if the dividend could grow.

See our latest analysis for Persimmon

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Persimmon distributed an unsustainably high 117% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Persimmon earnings per share are up 3.3% per annum over the last five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Persimmon has delivered 44% dividend growth per year on average over the past 10 years. 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.

The Bottom Line

Is Persimmon an attractive dividend stock, or better left on the shelf? Persimmon has been growing earnings per share at a reasonable rate, but over the last year its dividend was not well covered by earnings. In sum this is a middling combination, and we find it hard to get excited about the company from a dividend perspective.

However if you're still interested in Persimmon as a potential investment, you should definitely consider some of the risks involved with Persimmon. To help with this, we've discovered 1 warning sign for Persimmon that you should be aware of before investing in their shares.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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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. 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.
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