Stock Analysis

Palace Capital (LON:PCA) Is Paying Out A Dividend Of £0.0375

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The board of Palace Capital Plc (LON:PCA) has announced that it will pay a dividend on the 14th of April, with investors receiving £0.0375 per share. The dividend yield will be 6.9% based on this payment which is still above the industry average.

See our latest analysis for Palace Capital

Palace Capital Doesn't Earn Enough To Cover Its Payments

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, the company was paying out 159% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 36%. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

If the company can't turn things around, EPS could fall by 25.3% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could reach 195%, which could put the dividend in jeopardy if the company's earnings don't improve.

LSE:PCA Historic Dividend March 18th 2023

Palace Capital's Dividend Has Lacked Consistency

Looking back, Palace Capital's dividend hasn't been particularly consistent. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. The annual payment during the last 9 years was £0.04 in 2014, and the most recent fiscal year payment was £0.15. This means that it has been growing its distributions at 16% per annum over that time. Palace Capital has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Has Limited Growth Potential

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. Earnings per share has been sinking by 25% over the last five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future.

Palace Capital's Dividend Doesn't Look Sustainable

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We don't think Palace Capital is a great stock to add to your portfolio if income is your focus.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Palace Capital has 5 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about. Is Palace Capital not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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