Here's Why We're Wary Of Buying PZ Cussons Plc's (LON:PZC) For Its Upcoming Dividend

Simply Wall St

Readers hoping to buy PZ Cussons Plc (LON:PZC) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 8th of August, you won't be eligible to receive this dividend, when it is paid on the 3rd of October.

PZ Cussons's next dividend payment will be UK£0.056 per share, and in the last 12 months, the company paid a total of UK£0.083 per share. Looking at the last 12 months of distributions, PZ Cussons has a trailing yield of approximately 3.8% on its current stock price of £2.165. 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 PZ Cussons can afford its dividend, and if the dividend could grow.

View our latest analysis for PZ Cussons

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. PZ Cussons distributed an unsustainably high 133% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. It paid out more than half (67%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while PZ Cussons's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. 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.

LSE:PZC Historical Dividend Yield, August 4th 2019
LSE:PZC Historical Dividend Yield, August 4th 2019

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. PZ Cussons's earnings per share have fallen at approximately 22% a year over the previous 5 years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. PZ Cussons has delivered 5.6% dividend growth per year on average over the past 10 years. 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. PZ Cussons 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.

The Bottom Line

Should investors buy PZ Cussons for the upcoming dividend? Earnings per share have been shrinking in recent times. What's more, PZ Cussons is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of PZ Cussons.

Ever wonder what the future holds for PZ Cussons? See what the three analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.