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Readers hoping to buy Pental Limited (ASX:PTL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 6th of September in order to receive the dividend, which the company will pay on the 27th of September.
Pental's next dividend payment will be AU$0.013 per share. Last year, in total, the company distributed AU$0.02 to shareholders. Looking at the last 12 months of distributions, Pental has a trailing yield of approximately 6.3% on its current stock price of A$0.315. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
View our latest analysis for Pental
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. Pental paid out 142% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Pental fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Click here to see how much of its profit Pental paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Pental's 23% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Pental's dividend payments per share have declined at 24% per year on average over the past 10 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.