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Today we’ll take a closer look at Primerica, Inc. (NYSE:PRI) from a dividend investor’s perspective. Owning a strong dividend company and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
Investors might not know much about Primerica’s dividend prospects, even though it has been paying dividends for the last nine years and offers a 1.0% yield. While the yield may not look too great, the relatively long payment history is interesting. The company also bought back stock during the year, equivalent to approximately 3.9% of the company’s market capitalisation at the time. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.Explore this interactive chart for our latest analysis on Primerica!
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Primerica paid out 15% of its profit as dividends, over the trailing twelve month period. We’d say its dividends are thoroughly covered by earnings.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Primerica paid out 9.5% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable.
Is Primerica’s Balance Sheet Risky?
As Primerica has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick way to check a company’s financial situation uses these two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures a company’s total debt load relative to its earnings (lower = less debt), while net interest cover measures the company’s ability to pay the interest on its debt (higher = greater ability to pay interest costs). Primerica has net debt of 2.29 times its earnings before interest, tax, depreciation, and amortisation (EBITDA). Using debt can accelerate business growth, but also increases the risks.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. Net interest cover of 7.28 times its interest expense appears reasonable for Primerica, although we’re conscious that even high interest cover doesn’t make a company bulletproof.
Consider getting our latest analysis on Primerica’s financial position here.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. The first recorded dividend for Primerica, in the last decade, was nine years ago. Its dividend has not fluctuated much that time, which we like, but we’re conscious that the company might not yet have a track record of maintaining dividends in all economic conditions. During the past nine-year period, the first annual payment was US$0.04 in 2010, compared to US$1.36 last year. Dividends per share have grown at approximately 48% per year over this time.
The dividend has been growing pretty quickly, which could be enough to get us interested even though the dividend history is relatively short. Further research may be warranted.
Dividend Growth Potential
The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Primerica has grown its earnings per share at 21% per annum over the past five years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Firstly, we like that Primerica has low and conservative payout ratios. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we’d like. All things considered, Primerica looks like a strong prospect. At the right valuation, it could be something special.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 3 Primerica analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.