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It Might Not Be A Great Idea To Buy Psychemedics Corporation (NASDAQ:PMD) For Its Next Dividend

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Simply Wall St
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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 Psychemedics Corporation (NASDAQ:PMD) is about to go ex-dividend in just 4 days. You can purchase shares before the 5th of August in order to receive the dividend, which the company will pay on the 16th of August.

Psychemedics's upcoming dividend is US$0.18 a share, following on from the last 12 months, when the company distributed a total of US$0.72 per share to shareholders. Looking at the last 12 months of distributions, Psychemedics has a trailing yield of approximately 7.9% on its current stock price of $9.12. 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! As a result, readers should always check whether Psychemedics has been able to grow its dividends, or if the dividend might be cut.

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 distributed an unsustainably high 112% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year, it paid out more than three-quarters (83%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Psychemedics fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

NasdaqCM:PMD Historical Dividend Yield, July 31st 2019
NasdaqCM:PMD Historical Dividend Yield, July 31st 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. So we're not too excited that Psychemedics's earnings are down 2.1% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Psychemedics has lifted its dividend by approximately 0.6% a year on average.

The Bottom Line

Is Psychemedics worth buying for its dividend? It's never fun to see a company's earnings per share in retreat. Worse, Psychemedics's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Want to learn more about Psychemedics's dividend performance? Check out this visualisation of its historical revenue and earnings growth.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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. Thank you for reading.