PGG Wrightson (NZSE:PGW) Will Pay A Smaller Dividend Than Last Year

PGG Wrightson Limited's (NZSE:PGW) dividend is being reduced from last year's payment covering the same period to NZ$0.1176 on the 3rd of October. Despite the cut, the dividend yield of 5.5% will still be comparable to other companies in the industry.

See our latest analysis for PGG Wrightson

PGG Wrightson Is Paying Out More Than It Is Earning

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Prior to this announcement, PGG Wrightson's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 199% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

Earnings per share is forecast to rise by 0.4% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could reach 105%, which probably can't continue without putting some pressure on the balance sheet.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2013, the annual payment back then was NZ$0.10, compared to the most recent full-year payment of NZ$0.22. This works out to be a compound annual growth rate (CAGR) of approximately 8.2% a year over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. PGG Wrightson might have put its house in order since then, but we remain cautious.

PGG Wrightson Might Find It Hard To Grow Its Dividend

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. PGG Wrightson has impressed us by growing EPS at 17% per year over the past five years. Recently, the company has been able to grow earnings at a decent rate, but with the payout ratio on the higher end we don't think the dividend has many prospects for growth.

The Dividend Could Prove To Be Unreliable

Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. This company is not in the top tier of income providing stocks.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 1 warning sign for PGG Wrightson that you should be aware of before investing. Is PGG Wrightson not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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