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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Premier, Inc. (NASDAQ:PINC) is about to go ex-dividend in just 3 days. If you purchase the stock on or after the 26th of February, you won't be eligible to receive this dividend, when it is paid on the 15th of March.
Premier's next dividend payment will be US$0.19 per share, on the back of last year when the company paid a total of US$0.76 to shareholders. Last year's total dividend payments show that Premier has a trailing yield of 2.2% on the current share price of $33.83. 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 Premier can afford its dividend, and if the dividend could grow.
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. Premier paid out just 6.8% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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. Dividends consumed 54% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's positive to see that Premier'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 falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Premier's earnings per share have dropped 18% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Given that Premier has only been paying a dividend for a year, there's not much of a past history to draw insight from.
From a dividend perspective, should investors buy or avoid Premier? Earnings per share have fallen significantly, although at least Premier paid out less than half of its profits and free cash flow over the last year, leaving some margin of safety. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.
With that being said, if dividends aren't your biggest concern with Premier, you should know about the other risks facing this business. Be aware that Premier is showing 3 warning signs in our investment analysis, and 1 of those is significant...
If you're in the market for dividend stocks, we recommend checking our list of top 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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