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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.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 5 analysts we track are forecasting for Peabody Energy for free with public analyst estimates for the company. Is Peabody Energy not quite the opportunity you were looking for? Why not check out 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.