Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see PriceSmart, Inc. (NASDAQ:PSMT) is about to trade ex-dividend in the next 3 days. This means that investors who purchase shares on or after the 13th of August will not receive the dividend, which will be paid on the 31st of August.
PriceSmart's next dividend payment will be US$0.35 per share, and in the last 12 months, the company paid a total of US$0.70 per share. Looking at the last 12 months of distributions, PriceSmart has a trailing yield of approximately 1.1% on its current stock price of $66.64. 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 PriceSmart has been able to grow its dividends, or if the dividend might be cut.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. PriceSmart paid out a comfortable 27% of its profit last year. 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. Luckily it paid out just 24% of its free 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?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's not ideal to see PriceSmart's earnings per share have been shrinking at 3.4% a year over the previous 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, PriceSmart has lifted its dividend by approximately 3.4% a year on average.
The Bottom Line
Has PriceSmart got what it takes to maintain its dividend payments? PriceSmart has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. Overall, it's hard to get excited about PriceSmart from a dividend perspective.
In light of that, while PriceSmart has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 1 warning sign for PriceSmart and you should be aware of it before buying any shares.
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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