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PrairieSky Royalty Ltd. (TSE:PSK) will increase its dividend on the 15th of October to CA$0.09. Despite this raise, the dividend yield of 2.1% is only a modest boost to shareholder returns.
PrairieSky Royalty's Dividend Is Well Covered By Earnings
While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Prior to this announcement, PrairieSky Royalty's dividend made up quite a large proportion of earnings but only 66% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.
Looking forward, earnings per share is forecast to rise by 54.8% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 47%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
PrairieSky Royalty Is Still Building Its Track Record
The company has been paying a dividend for a while, but the track record hasn't been the best. Due to this, we are a little bit cautious about the payment consistency over a full economic cycle. Since 2014, the dividend has gone from CA$1.27 to CA$0.36. The dividend has fallen 72% over that period. A company that decreases its dividend over time generally isn't what we are looking for.
PrairieSky Royalty Might Find It Hard To Grow Its Dividend
With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS is growing. We are encouraged to see that PrairieSky Royalty has grown earnings per share at 27% per year over the past five years. Earnings per share is growing nicely, but the company is paying out most of its earnings as dividends. This might be sustainable, but we wonder why PrairieSky Royalty is not retaining those earnings to reinvest in growth.
Our Thoughts On PrairieSky Royalty's Dividend
Overall, we always like to see the dividend being raised, but we don't think PrairieSky Royalty will make a great income stock. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We would be a touch cautious of relying on this stock primarily for the dividend income.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 1 warning sign for PrairieSky Royalty that investors should know about before committing capital to this stock. We have also put together a list of global stocks with a solid dividend.
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.
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