We Wouldn't Be Too Quick To Buy Perrigo Company plc (NYSE:PRGO) Before It Goes Ex-Dividend

Perrigo Company plc (NYSE:PRGO) is about to trade ex-dividend in the next 4 days. The ex-dividend date occurs one day before the record date, which is the day on which shareholders need to be on the company's books in order 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. This means that investors who purchase Perrigo's shares on or after the 7th of March will not receive the dividend, which will be paid on the 25th of March.

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$1.10 per share to shareholders. Last year's total dividend payments show that Perrigo has a trailing yield of 3.8% on the current share price of US$29.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Perrigo can afford its dividend, and if the dividend could grow.

View our latest analysis for Perrigo

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 last year, so it's not great to see that it has continued paying a dividend. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Perrigo didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. It paid out more than half (64%) of its free cash flow in the past year, which is within an average range for most companies.

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Perrigo was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Perrigo has delivered 10% dividend growth per year on average over the past 10 years.

We update our analysis on Perrigo every 24 hours, so you can always get the latest insights on its financial health, here.

Final Takeaway

Is Perrigo worth buying for its dividend? It's hard to get used to Perrigo paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that in mind though, if the poor dividend characteristics of Perrigo don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 2 warning signs for Perrigo you should know about.

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.