Here's Why We're Wary Of Buying Permian Basin Royalty Trust's (NYSE:PBT) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Permian Basin Royalty Trust (NYSE:PBT) is about to go ex-dividend in just three days. You can purchase shares before the 25th of February in order to receive the dividend, which the company will pay on the 12th of March.

Permian Basin Royalty Trust's next dividend payment will be US$0.016 per share, and in the last 12 months, the company paid a total of US$0.30 per share. Looking at the last 12 months of distributions, Permian Basin Royalty Trust has a trailing yield of approximately 3.4% on its current stock price of $4.36. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Permian Basin Royalty Trust

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Permian Basin Royalty Trust paid out 100% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances.

Click here to see how much of its profit Permian Basin Royalty Trust paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Permian Basin Royalty Trust's earnings per share have fallen at approximately 22% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Permian Basin Royalty Trust has seen its dividend decline 17% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

Final Takeaway

Is Permian Basin Royalty Trust worth buying for its dividend? Not only are earnings per share shrinking, but Permian Basin Royalty Trust is paying out a disconcertingly high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. This is not an overtly appealing combination of characteristics, and we're just not that interested in this company's dividend.

Although, if you're still interested in Permian Basin Royalty Trust and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 2 warning signs with Permian Basin Royalty Trust and understanding them should be part of your investment process.

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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