Here's Why We're Wary Of Buying PetMed Express' (NASDAQ:PETS) For Its Upcoming Dividend
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see PetMed Express, Inc. (NASDAQ:PETS) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. This means that investors who purchase PetMed Express' shares on or after the 11th of August will not receive the dividend, which will be paid on the 18th of August.
The company's next dividend payment will be US$0.30 per share, and in the last 12 months, the company paid a total of US$1.20 per share. Based on the last year's worth of payments, PetMed Express has a trailing yield of 9.0% on the current stock price of $13.28. 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! So we need to investigate whether PetMed Express can afford its dividend, and if the dividend could grow.
See our latest analysis for PetMed Express
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. PetMed Express 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. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. 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. PetMed Express paid out more free cash flow than it generated - 148%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
PetMed Express does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. PetMed Express 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.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. PetMed Express has delivered 7.2% dividend growth per year on average over the past 10 years.
Remember, you can always get a snapshot of PetMed Express's financial health, by checking our visualisation of its financial health, here.
The Bottom Line
Should investors buy PetMed Express for the upcoming dividend? It's hard to get used to PetMed Express paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of PetMed Express.
With that being said, if you're still considering PetMed Express as an investment, you'll find it beneficial to know what risks this stock is facing. To help with this, we've discovered 1 warning sign for PetMed Express that you should be aware of before investing in their 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.
