Don't Buy PGG Wrightson Limited (NZSE:PGW) For Its Next Dividend Without Doing These Checks

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that PGG Wrightson Limited (NZSE:PGW) is about to go ex-dividend in just four 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Thus, you can purchase PGG Wrightson's shares before the 9th of September in order to receive the dividend, which the company will pay on the 4th of October.

The company's next dividend payment will be NZ$0.19 per share, on the back of last year when the company paid a total of NZ$0.32 to shareholders. Based on the last year's worth of payments, PGG Wrightson stock has a trailing yield of around 8.3% on the current share price of NZ$3.85. 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! So we need to investigate whether PGG Wrightson can afford its dividend, and if the dividend could grow.

See our latest analysis for PGG Wrightson

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year PGG Wrightson paid out 93% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. What's good is that dividends were well covered by free cash flow, with the company paying out 18% of its cash flow last year.

It's good to see that while PGG Wrightson's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see PGG Wrightson's earnings per share have dropped 12% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past eight years, PGG Wrightson has increased its dividend at approximately 16% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. PGG Wrightson is already paying out 93% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Is PGG Wrightson an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 93% of its profit 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 mis-match between income and cashflow. It's not that we think PGG Wrightson is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in PGG Wrightson and want to know more, you'll find it very useful to know what risks this stock faces. Be aware that PGG Wrightson is showing 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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.

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