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It Might Not Be A Great Idea To Buy Premier Investments Limited (ASX:PMV) For Its Next Dividend

Simply Wall St

Premier Investments Limited (ASX:PMV) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 25th of October will not receive the dividend, which will be paid on the 15th of November.

Premier Investments's next dividend payment will be AU$0.4 per share, and in the last 12 months, the company paid a total of AU$0.7 per share. Based on the last year's worth of payments, Premier Investments stock has a trailing yield of around 3.8% on the current share price of A$19.25. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Premier Investments has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Premier Investments

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Premier Investments paid out 104% of its earnings, which is more than we're comfortable with, unless there are mitigating 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. Over the last year, it paid out more than three-quarters (88%) 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 Premier Investments 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. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

ASX:PMV Historical Dividend Yield, October 20th 2019

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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Premier Investments, with earnings per share up 7.5% on average over the last five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Premier Investments has delivered an average of 7.8% per year annual increase in its dividend, based on the past ten years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

Has Premier Investments got what it takes to maintain its dividend payments? Earnings per share have not grown all that much, and the company is paying out an uncomfortably high percentage of its income. Fortunately it paid out a lower percentage of its cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Premier Investments.

Ever wonder what the future holds for Premier Investments? See what the seven analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.