Do These 3 Checks Before Buying Psychemedics Corporation (NASDAQ:PMD) For Its Upcoming Dividend
It looks like Psychemedics Corporation (NASDAQ:PMD) is about to go ex-dividend in the next four 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, Psychemedics investors that purchase the stock on or after the 24th of May will not receive the dividend, which will be paid on the 8th of June.
The company's next dividend payment will be US$0.07 per share. Last year, in total, the company distributed US$0.28 to shareholders. Based on the last year's worth of payments, Psychemedics stock has a trailing yield of around 5.6% on the current share price of $4.99. If you buy this business for its dividend, you should have an idea of whether Psychemedics's dividend is reliable and sustainable. So we need to investigate whether Psychemedics can afford its dividend, and if the dividend could grow.
View our latest analysis for Psychemedics
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Psychemedics lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the 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. Fortunately, it paid out only 25% of its free cash flow in the past year.
Click here to see how much of its profit Psychemedics paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Psychemedics 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. Psychemedics has seen its dividend decline 7.3% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
We update our analysis on Psychemedics every 24 hours, so you can always get the latest insights on its financial health, here.
To Sum It Up
Has Psychemedics got what it takes to maintain its dividend payments? It's hard to get used to Psychemedics paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Psychemedics.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Psychemedics. To help with this, we've discovered 3 warning signs for Psychemedics (1 is a bit concerning!) that you ought to be aware of before buying the shares.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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.
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