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Don't Buy PTB Group Limited (ASX:PTB) For Its Next Dividend Without Doing These Checks

Simply Wall St

PTB Group Limited (ASX:PTB) stock is about to trade ex-dividend in 4 days time. This means that investors who purchase shares on or after the 7th of February will not receive the dividend, which will be paid on the 2nd of March.

Group's next dividend payment will be AU$0.025 per share. Last year, in total, the company distributed AU$0.07 to shareholders. Based on the last year's worth of payments, Group has a trailing yield of 2.7% on the current stock price of A$0.91. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Group paid out 123% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Group paid out more free cash flow than it generated - 150%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cash is slightly more important than profit from a dividend perspective, but given Group's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see how much of its profit Group paid out over the last 12 months.

ASX:PTB Historical Dividend Yield, February 2nd 2020

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Group's earnings have been skyrocketing, up 35% per annum for the past five years. Earnings per share have been growing rapidly, but the company is paying out a dividend that looks unsustainably high. Generally, when a company is paying out more than it earned as dividends, it could signal either that the company is spending heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Group has seen its dividend decline 9.7% per annum on average over the past seven years, which is not great to see. Group is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

Final Takeaway

Is Group an attractive dividend stock, or better left on the shelf? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Group.

Keen to explore more data on Group's financial performance? Check out our visualisation of its historical revenue and earnings growth.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

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