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Pact Group Holdings Ltd (ASX:PGH) is about to trade ex-dividend in the next 2 days. If you purchase the stock on or after the 25th of February, you won't be eligible to receive this dividend, when it is paid on the 7th of April.
Pact Group Holdings's next dividend payment will be AU$0.05 per share, and in the last 12 months, the company paid a total of AU$0.10 per share. Based on the last year's worth of payments, Pact Group Holdings has a trailing yield of 3.3% on the current stock price of A$3.06. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. That's why it's good to see Pact Group Holdings paying out a modest 26% of its earnings. 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. It paid out 7.2% of its free cash flow as dividends last year, which is conservatively low.
It's positive to see that Pact Group Holdings's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Pact Group Holdings earnings per share are up 5.6% per annum over the last five years. Management have been reinvested more than half of the company's earnings within the business, and the company has been able to grow earnings with this retained capital. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past six years, Pact Group Holdings has increased its dividend at approximately 0.9% a year on average.
The Bottom Line
Has Pact Group Holdings got what it takes to maintain its dividend payments? Earnings per share growth has been growing somewhat, and Pact Group Holdings is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Pact Group Holdings is halfway there. Overall we think this is an attractive combination and worthy of further research.
In light of that, while Pact Group Holdings has an appealing dividend, it's worth knowing the risks involved with this stock. Be aware that Pact Group Holdings is showing 4 warning signs in our investment analysis, and 1 of those shouldn't be ignored...
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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