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

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Permian Basin Royalty Trust (NYSE:PBT) is about to trade ex-dividend in the next 3 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a 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. Accordingly, Permian Basin Royalty Trust investors that purchase the stock on or after the 30th of August will not receive the dividend, which will be paid on the 15th of September.

The company's upcoming dividend is US$0.02 a share, following on from the last 12 months, when the company distributed a total of US$0.16 per share to shareholders. Calculating the last year's worth of payments shows that Permian Basin Royalty Trust has a trailing yield of 3.6% on the current share price of $5.27. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Permian Basin Royalty Trust can afford its dividend, and if the dividend could grow.

See our latest analysis for Permian Basin Royalty Trust

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Permian Basin Royalty Trust paid out 99% 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?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Permian Basin Royalty Trust's earnings per share have fallen at approximately 14% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

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. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

From a dividend perspective, should investors buy or avoid Permian Basin Royalty Trust? 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. All things considered, we're not optimistic about its dividend prospects, and would be inclined to leave it on the shelf for now.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Permian Basin Royalty Trust. For example, we've found 2 warning signs for Permian Basin Royalty Trust (1 makes us a bit uncomfortable!) that deserve your attention before investing in the shares.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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