Do These 3 Checks Before Buying Perrigo Company plc (NYSE:PRGO) For Its Upcoming Dividend

Perrigo Company plc (NYSE:PRGO) stock is about to trade ex-dividend in 4 days. The ex-dividend date is usually set to be one business day before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Thus, you can purchase Perrigo's shares before the 30th of May in order to receive the dividend, which the company will pay on the 17th of June.

The company's upcoming dividend is US$0.29 a share, following on from the last 12 months, when the company distributed a total of US$1.16 per share to shareholders. Based on the last year's worth of payments, Perrigo has a trailing yield of 4.4% on the current stock price of US$26.56. If you buy this business for its dividend, you should have an idea of whether Perrigo's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

Our free stock report includes 1 warning sign investors should be aware of before investing in Perrigo. Read for free now.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Perrigo reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. The company paid out 91% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

View our latest analysis for Perrigo

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Perrigo reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Perrigo has delivered 11% dividend growth per year on average over the past 10 years.

Remember, you can always get a snapshot of Perrigo's financial health, by checking our visualisation of its financial health, here.

To Sum It Up

Should investors buy Perrigo for the upcoming dividend? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. Bottom line: Perrigo has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Perrigo as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 1 warning sign for Perrigo and you should be aware of this before buying any shares.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.