Don't Buy Palace Capital Plc (LON:PCA) For Its Next Dividend Without Doing These Checks

Palace Capital Plc (LON:PCA) stock is about to trade ex-dividend in 3 days. You will need to purchase shares before the 18th of March to receive the dividend, which will be paid on the 9th of April.

Palace Capital's next dividend payment will be UK£0.025 per share. Last year, in total, the company distributed UK£0.10 to shareholders. Calculating the last year's worth of payments shows that Palace Capital has a trailing yield of 4.3% on the current share price of £2.34. If you buy this business for its dividend, you should have an idea of whether Palace Capital's dividend is reliable and sustainable. As a result, readers should always check whether Palace Capital has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Palace Capital

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Palace Capital reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If Palace Capital didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Over the last year, it paid out more than three-quarters (76%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Palace Capital was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Palace Capital has delivered an average of 14% per year annual increase in its dividend, based on the past seven years of dividend payments.

Remember, you can always get a snapshot of Palace Capital's financial health, by checking our visualisation of its financial health, here.

Final Takeaway

From a dividend perspective, should investors buy or avoid Palace Capital? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Palace Capital.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Palace Capital. Our analysis shows 2 warning signs for Palace Capital that we strongly recommend you have a look at before investing in the company.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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