Palace Capital Plc's (LON:PCA) investors are due to receive a payment of UK£0.03 per share on 15th of October. This makes the dividend yield 4.4%, which will augment investor returns quite nicely.
Palace Capital's Distributions May Be Difficult To Sustain
If the payments aren't sustainable, a high yield for a few years won't matter that much. Even while not generating a profit, Palace Capital is paying out most of its free cash flows as a dividend. Generally paying a dividend without making profits isn't a great idea and we are also worried that there is limited reinvestment into the business.
Over the next year, EPS might fall by 55.4% based on recent performance. This will push the company into unprofitability, which means the managers will have to choose between suspending the dividend, or paying it out of cash reserves.
Palace Capital's Dividend Has Lacked Consistency
It's comforting to see that Palace Capital has been paying a dividend for a number of years now, however it has been cut at least once in that time. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. The dividend has gone from UK£0.04 in 2014 to the most recent annual payment of UK£0.12. This implies that the company grew its distributions at a yearly rate of about 17% over that duration. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.
Dividend Growth Potential Is Shaky
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Palace Capital's earnings per share has shrunk at 55% a year over the past five years. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in.
Palace Capital's Dividend Doesn't Look Sustainable
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. The track record isn't great, and the payments are a bit high to be considered sustainable. We don't think Palace Capital is a great stock to add to your portfolio if income is your focus.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 2 warning signs for Palace Capital (1 makes us a bit uncomfortable!) that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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