It Might Not Be A Great Idea To Buy Permian Basin Royalty Trust (NYSE:PBT) For Its Next Dividend

By
Simply Wall St
Published
July 24, 2021
NYSE:PBT
Source: Shutterstock

Permian Basin Royalty Trust (NYSE:PBT) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase Permian Basin Royalty Trust's shares before the 29th of July in order to be eligible for the dividend, which will be paid on the 13th of August.

The company's next dividend payment will be US$0.021 per share. Last year, in total, the company distributed US$0.15 to shareholders. 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 $5.25. 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.

See our latest analysis for Permian Basin Royalty Trust

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Permian Basin Royalty Trust paid out 98% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings.

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

historic-dividend
NYSE:PBT Historic Dividend July 24th 2021

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by Permian Basin Royalty Trust's 16% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Permian Basin Royalty Trust's dividend payments per share have declined at 18% per year on average over the past 10 years, which is uninspiring. 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.

The Bottom Line

Is Permian Basin Royalty Trust worth buying for its dividend? Earnings per share are in decline and Permian Basin Royalty Trust is paying out what we feel is an uncomfortably 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. These characteristics don't generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its 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. Be aware that Permian Basin Royalty Trust is showing 3 warning signs in our investment analysis, and 1 of those can't be ignored...

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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