Here's What We Like About PriceSmart's (NASDAQ:PSMT) Upcoming Dividend

PriceSmart, Inc. (NASDAQ:PSMT) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. This means that investors who purchase PriceSmart's shares on or after the 17th of February will not receive the dividend, which will be paid on the 27th of February.

The company's next dividend payment will be US$0.70 per share. Last year, in total, the company distributed US$1.26 to shareholders. Based on the last year's worth of payments, PriceSmart has a trailing yield of 0.9% on the current stock price of US$155.12. If you buy this business for its dividend, you should have an idea of whether PriceSmart's dividend is reliable and sustainable. So we need to investigate whether PriceSmart can afford its dividend, and if the dividend could grow.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

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. That's why it's good to see PriceSmart paying out a modest 26% of its 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. Thankfully its dividend payments took up just 31% of the free cash flow it generated, which is a comfortable payout ratio.

It's positive to see that PriceSmart's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

See our latest analysis for PriceSmart

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, PriceSmart's earnings per share have been growing at 14% a year for the past five years. Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. PriceSmart has delivered an average of 7.2% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

Should investors buy PriceSmart for the upcoming dividend? We love that PriceSmart is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. PriceSmart looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. For example, we've found 1 warning sign for PriceSmart that we recommend you consider before investing in the business.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.