The board of Peabody Energy Corporation (NYSE:BTU) has announced that it will pay a dividend of $0.075 per share on the 3rd of December. The dividend yield is 1.1% based on this payment, which is a little bit low compared to the other companies in the industry.
While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that Peabody Energy’s stock price has increased by 64% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.
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It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Despite not generating a profit, Peabody Energy is still paying a dividend. Along with this, it is also not generating free cash flows, which raises concerns about the sustainability of the dividend.
According to analysts, EPS should be several times higher next year. Assuming the dividend continues along recent trends, we think the payout ratio will be 12%, which makes us pretty comfortable with the sustainability of the dividend.
View our latest analysis for Peabody Energy
Even in its relatively short history, the company has reduced the dividend at least once. If the company cuts once, it definitely isn’t argument against the possibility of it cutting in the future. Since 2017, the annual payment back then was $0.46, compared to the most recent full-year payment of $0.30. The dividend has shrunk at around 5.2% a year during that period. A company that decreases its dividend over time generally isn’t what we are looking for.
With a relatively unstable dividend, and a poor history of shrinking dividends, it’s even more important to see if EPS is growing. It’s encouraging to see that Peabody Energy has been growing its earnings per share at 48% a year over the past five years. While the company hasn’t yet recorded a profit, the growth rates are healthy. If the company can turn a profit relatively soon, we can see this becoming a reliable income stock.
Overall, it’s nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. In general, the distributions are a little bit higher than we would like, but we can’t ignore the fact the quickly growing earnings gives this stock great potential in the future. We would be a touch cautious of relying on this stock primarily for the dividend income.