Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see PermRock Royalty Trust (NYSE:PRT) is about to trade ex-dividend in the next 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase PermRock Royalty Trust's shares before the 29th of June to receive the dividend, which will be paid on the 15th of July.
The company's next dividend payment will be US$0.10 per share. Last year, in total, the company distributed US$0.73 to shareholders. Based on the last year's worth of payments, PermRock Royalty Trust has a trailing yield of 9.7% on the current stock price of $8.17. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether PermRock Royalty Trust can afford its dividend, and if the dividend could grow.
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. PermRock Royalty Trust paid out 100% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see PermRock Royalty Trust's earnings per share have dropped 11% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. PermRock Royalty Trust's dividend payments per share have declined at 16% per year on average over the past four years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
To Sum It Up
Has PermRock Royalty Trust got what it takes to maintain its dividend payments? Earnings per share are in decline and PermRock Royalty Trust is paying out what we feel is an uncomfortably high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. All things considered, we're not optimistic about its dividend prospects, and would be inclined to leave it on the shelf for now.
So if you're still interested in PermRock Royalty Trust despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 4 warning signs with PermRock Royalty Trust (at least 1 which is a bit concerning), and understanding these should be part of your investment process.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
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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.