Yahoo Finance Dividend Investors: Don't Be Too Quick To Buy Premier, Inc. (NASDAQ:PINC) For Its Upcoming Dividend
Premier, Inc. (NASDAQ:PINC) stock is about to trade ex-dividend in 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. Accordingly, Premier investors that purchase the stock on or after the 31st of May will not receive the dividend, which will be paid on the 15th of June.
The company's upcoming dividend is US$0.21 a share, following on from the last 12 months, when the company distributed a total of US$0.84 per share to shareholders. Calculating the last year's worth of payments shows that Premier has a trailing yield of 4.4% on the current share price of US$18.99. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Premier has been able to grow its dividends, or if the dividend might be cut.
See our latest analysis for Premier
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. Premier distributed an unsustainably high 123% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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 distributed 46% of its free cash flow as dividends, a comfortable payout level for most companies.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Premier 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 the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Premier's 26% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past four years, Premier has increased its dividend at approximately 2.5% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Premier is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
Final Takeaway
Has Premier got what it takes to maintain its dividend payments? It's not a great combination to see a company with earnings in decline and paying out 123% of its profits, which could imply the dividend may be at risk of being cut in the future. 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 Premier is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
With that being said, if you're still considering Premier as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 3 warning signs for Premier and you should be aware of these before buying any shares.
If you're in the market for strong dividend payers, we recommend checking our selection of top 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.
