Here's Why We're Wary Of Buying PermRock Royalty Trust's (NYSE:PRT) For Its Upcoming Dividend

PermRock Royalty Trust (NYSE:PRT) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, PermRock 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 next dividend payment will be US$0.062 per share, and in the last 12 months, the company paid a total of US$0.73 per share. Calculating the last year's worth of payments shows that PermRock Royalty Trust has a trailing yield of 6.6% on the current share price of $6.45. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for PermRock 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, PermRock 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 PermRock Royalty Trust paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. PermRock Royalty Trust's earnings per share plummeted 25% over the past year,which is rarely good news for the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. PermRock Royalty Trust has seen its dividend decline 35% per annum on average over the past three years, which is not great to see. 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.

Final Takeaway

Has PermRock Royalty Trust got what it takes to maintain its dividend payments? Not only are earnings per share shrinking, but PermRock 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. All things considered, we're not optimistic about its dividend prospects, and would be inclined to leave it on the shelf for now.

With that in mind though, if the poor dividend characteristics of PermRock Royalty Trust don't faze you, it's worth being mindful of the risks involved with this business. We've identified 4 warning signs with PermRock Royalty Trust (at least 1 which is concerning), and understanding them should be part of your investment process.

If you're in the market for dividend stocks, we recommend checking our list of top 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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