Why It Might Not Make Sense To Buy Permian Basin Royalty Trust (NYSE:PBT) For Its Upcoming Dividend

Readers hoping to buy Permian Basin Royalty Trust (NYSE:PBT) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 30th of December, you won't be eligible to receive this dividend, when it is paid on the 14th of January.

Permian Basin Royalty Trust's next dividend payment will be US$0.013 per share. Last year, in total, the company distributed US$0.30 to shareholders. Looking at the last 12 months of distributions, Permian Basin Royalty Trust has a trailing yield of approximately 6.0% on its current stock price of $3.42. If you buy this business for its dividend, you should have an idea of whether Permian Basin Royalty Trust's dividend is reliable and sustainable. So we need to investigate whether Permian Basin Royalty Trust can afford its dividend, and if the dividend could grow.

View 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 100% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Permian Basin Royalty Trust's 22% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Permian Basin Royalty Trust's dividend payments per share have declined at 13% 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.

Final Takeaway

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.

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 that we recommend you consider before investing in the business.

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.

If you decide to trade Permian Basin Royalty Trust, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.