Don’t buy PGG Wrightson Limited (NZSE: PGW) for its next dividend without doing these checks

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Some investors rely on dividends to grow their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that PGG Wrightson Limited (NZSE: PGW) is set to be ex-dividend in just four days. Typically, the ex-dividend date is one business day prior to the record date which is the date a company determines which shareholders are eligible to receive a dividend. The ex-dividend date is an important date to know, as any purchase of shares made on or after that date may mean a late settlement that does not appear on the record date. Thus, you can buy PGG Wrightson shares before September 9 in order to receive the dividend that the company will pay on October 4.

The company’s next dividend payment will be NZ $ 0.19 per share, compared to last year when the company paid a total of NZ $ 0.32 to shareholders. Based on the value of last year’s payouts, the PGG Wrightson share has a rolling yield of approximately 8.3% on the current share price of NZ $ 3.85. We love to see companies pay a dividend, but it’s also important to make sure that laying the golden eggs is not going to kill our goose that lays the golden eggs! So we need to determine if PGG Wrightson can afford its dividend and if the dividend could increase.

See our latest review for PGG Wrightson

Dividends are generally paid out of company profits. If a company pays more dividends than it made a profit, then the dividend could be unsustainable. Last year, PGG Wrightson paid out 93% of its profits as dividends to shareholders, which suggests that the dividend is not well covered by profits. Having said that, even very profitable companies can sometimes not generate enough cash to pay the dividend, which is why we always need to check if the dividend is covered by cash flow. The good thing is that dividends were well covered by free cash flow, with the company paying 18% of its cash flow last year.

It’s good to see that while PGG Wrightson’s dividends weren’t well covered by earnings, they are at least affordable from a cash perspective. However, if the company continues to pay out such a high percentage of its profits, the dividend could be at risk if business goes badly.

Click on here to see the company’s payout ratio, as well as analysts’ estimates of its future dividends.

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Have profits and dividends increased?

Companies with declining profits are riskier for dividend shareholders. Investors love dividends, so if earnings go down and the dividend is reduced, expect a stock to be sold massively at the same time. Readers will then understand why we are concerned that PGG Wrightson’s earnings per share have fallen 12% per year over the past five years. When earnings per share decrease, the maximum amount of dividends that can be paid also decreases.

Most investors will primarily assess a company’s dividend prospects by checking the historical rate of dividend growth. Over the past eight years, PGG Wrightson has increased its dividend by around 16% per year on average. It’s intriguing, but the combination of growing dividends despite falling profits can usually only be achieved by paying a higher percentage of the profits. PGG Wrightson is already paying out 93% of its profits, and with declining profits, we believe this dividend is unlikely to grow quickly in the future.

Last takeaways

Is PGG Wrightson an attractive dividend-paying stock, or rather left on the shelf? It’s never great to see earnings per share go down, especially when a company pays out 93% of their profits as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower – good news from a dividend perspective – which makes us wonder why there is such a mismatch between income and cash flow. It’s not that we think PGG Wrightson is a bad company, but these characteristics don’t usually lead to outstanding dividend performance.

However, if you are still interested in PGG Wrightson and want to learn more, it will be very helpful for you to know what are the risks that this title faces. Be aware that PGG Wrightson watch 3 warning signs in our investment analysis, and 1 of them should not be ignored …

A common investment mistake is to buy the first interesting stock you see. Here you can find a list of promising dividend-paying stocks with a yield above 2% and a future dividend.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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