PermRock Royalty Trust (NYSE:PRT) Is Paying Out A Larger Dividend Than Last Year

The board of PermRock Royalty Trust (NYSE:PRT) has announced that it will be increasing its dividend on the 14th of February to US$0.071. This will take the dividend yield from 7.9% to 8.6%, providing a nice boost to shareholder returns.

Check out our latest analysis for PermRock Royalty Trust

PermRock Royalty Trust Doesn't Earn Enough To Cover Its Payments

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, the company was paying out 100% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only . Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

Looking forward, EPS could fall by 18.2% if the company can't turn things around from the last few years. If the dividend continues along recent trends, we estimate the payout ratio could reach 172%, which could put the dividend in jeopardy if the company's earnings don't improve.

PermRock Royalty Trust's Dividend Has Lacked Consistency

Even in its short history, we have seen the dividend cut. Since 2019, the first annual payment was US$1.55, compared to the most recent full-year payment of US$0.61. The dividend has fallen 61% over that period. A company that decreases its dividend over time generally isn't what we are looking for.

The Dividend Has Limited Growth Potential

Dividends have been going in the wrong direction, so we definitely want to see a different trend in the earnings per share. Earnings per share has been sinking by 18% over the last five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future.

PermRock Royalty Trust's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think PermRock Royalty Trust's payments are rock solid. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We don't think PermRock Royalty Trust is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 2 warning signs for PermRock Royalty Trust that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.

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

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.