Premier Investments Limited (ASX:PMV) is about to trade ex-dividend in the next four days. You can purchase shares before the 6th of January in order to receive the dividend, which the company will pay on the 28th of January.
Premier Investments's next dividend payment will be AU$0.36 per share, on the back of last year when the company paid a total of AU$0.70 to shareholders. Looking at the last 12 months of distributions, Premier Investments has a trailing yield of approximately 3.0% on its current stock price of A$23.51. If you buy this business for its dividend, you should have an idea of whether Premier Investments's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
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. Its dividend payout ratio is 81% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. It could become a concern if earnings started to decline. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 12% of its cash flow last year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Premier Investments, with earnings per share up 9.0% on average over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Premier Investments has increased its dividend at approximately 2.3% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
To Sum It Up
From a dividend perspective, should investors buy or avoid Premier Investments? Earnings per share growth has been modest and Premier Investments paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. To summarise, Premier Investments looks okay on this analysis, although it doesn't appear a stand-out opportunity.
While it's tempting to invest in Premier Investments for the dividends alone, you should always be mindful of the risks involved. For example - Premier Investments has 1 warning sign we think you should be aware of.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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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