Here's Why We're Wary Of Buying PZ Cussons' (LON:PZC) For Its Upcoming Dividend

Readers hoping to buy PZ Cussons Plc (LON:PZC) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 11th of February in order to be eligible for this dividend, which will be paid on the 1st of April.

PZ Cussons's next dividend payment will be UK£0.027 per share. Last year, in total, the company distributed UK£0.058 to shareholders. Based on the last year's worth of payments, PZ Cussons stock has a trailing yield of around 2.2% on the current share price of £2.65. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether PZ Cussons has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for PZ Cussons

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. PZ Cussons distributed an unsustainably high 120% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The good news is it paid out just 9.1% of its free cash flow in the last year.

It's good to see that while PZ Cussons's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see PZ Cussons's earnings per share have dropped 17% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. PZ Cussons's dividend payments are broadly unchanged compared to where they were 10 years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.

Final Takeaway

From a dividend perspective, should investors buy or avoid PZ Cussons? It's never great to see earnings per share declining, especially when a company is paying out 120% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Bottom line: PZ Cussons has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

So if you're still interested in PZ Cussons despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. In terms of investment risks, we've identified 3 warning signs with PZ Cussons and understanding them should be part of your investment process.

If you're in the market for dividend stocks, we recommend checking our list of top 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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