Permian Basin Royalty Trust's (NYSE:PBT) dividend will be increasing to US$0.032 on 14th of February. Although the dividend is now higher, the yield is only 1.9%, which is below the industry average.
While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that Permian Basin Royalty Trust's stock price has increased by 59% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.
Permian Basin Royalty Trust Is Paying Out More Than It Is Earning
Even a low dividend yield can be attractive if it is sustained for years on end. Before making this announcement, Permian Basin Royalty Trust's dividend was higher than its profits, but the free cash flows quite comfortably covered it. 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 9.1% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could reach 124%, which could put the dividend in jeopardy if the company's earnings don't improve.
Permian Basin Royalty Trust's Track Record Isn't Great
The dividend hasn't seen any major cuts in the last 10 years, but it has slowly been decreasing. Since 2012, the first annual payment was US$1.37, compared to the most recent full-year payment of US$0.25. This works out to a decline of approximately 82% over that time. A company that decreases its dividend over time generally isn't what we are looking for.
Dividend Growth May Be Hard To Come By
Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. In the last five years, Permian Basin Royalty Trust's earnings per share has shrunk at approximately 9.1% per annum. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth.
Our Thoughts On Permian Basin Royalty Trust's Dividend
Overall, we always like to see the dividend being raised, but we don't think Permian Basin Royalty Trust will make a great income stock. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. This company is not in the top tier of income providing stocks.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. To that end, Permian Basin Royalty Trust has 3 warning signs (and 1 which is potentially serious) we think you should know about. We have also put together a list of global stocks with a solid dividend.
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.