It looks like Pental Limited (ASX:PTL) is about to go ex-dividend in the next two days. You can purchase shares before the 30th of July in order to receive the dividend, which the company will pay on the 7th of August.
Pental's next dividend payment will be AU$0.007 per share. Last year, in total, the company distributed AU$0.02 to shareholders. Last year's total dividend payments show that Pental has a trailing yield of 4.9% on the current share price of A$0.405. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Pental distributed an unsustainably high 140% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Pental generated enough free cash flow to afford its dividend. It paid out more than half (73%) of its free cash flow in the past year, which is within an average range for most companies.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Pental fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Pental's earnings per share have fallen at approximately 23% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Pental's dividend payments per share have declined at 24% per year on average over the past 10 years, which is uninspiring. 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.
The Bottom Line
Should investors buy Pental for the upcoming dividend? Earnings per share have been in decline, which is not encouraging. What's more, Pental is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. Bottom line: Pental 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 Pental as an investment, you'll find it beneficial to know what risks this stock is facing. In terms of investment risks, we've identified 3 warning signs with Pental and understanding them should be part of your investment process.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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. 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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