Yahoo Finance Is PetMed Express, Inc. (NASDAQ:PETS) A Smart Choice For Dividend Investors?
Today we'll take a closer look at PetMed Express, Inc. (NASDAQ:PETS) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
A high yield and a long history of paying dividends is an appealing combination for PetMed Express. It would not be a surprise to discover that many investors buy it for the dividends. During the year, the company also conducted a buyback equivalent to around 2.2% of its market capitalisation. Some simple analysis can reduce the risk of holding PetMed Express for its dividend, and we'll focus on the most important aspects below.
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Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. PetMed Express paid out 86% of its profit as dividends, over the trailing twelve month period. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. The company paid out 67% of its free cash flow, which is not bad per se, but does start to limit the amount of cash PetMed Express has available to meet other needs. It's positive to see that PetMed Express'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.
With a strong net cash balance, PetMed Express investors may not have much to worry about in the near term from a dividend perspective.
We update our data on PetMed Express every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Volatility
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of PetMed Express's dividend payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past ten-year period, the first annual payment was US$0.40 in 2010, compared to US$1.08 last year. Dividends per share have grown at approximately 10% per year over this time.
Dividends have been growing pretty quickly, and even more impressively, they haven't experienced any notable falls during this period.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. PetMed Express has grown its earnings per share at 6.9% per annum over the past five years. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.
Conclusion
To summarise, shareholders should always check that PetMed Express's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. PetMed Express's is paying out more than half its income as dividends, but at least the dividend is covered by both reported earnings and cashflow. Earnings growth has been limited, but we like that the dividend payments have been fairly consistent. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than PetMed Express out there.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 1 warning sign for PetMed Express that investors need to be conscious of moving forward.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
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.
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. Thank you for reading.
