Perrigo Company plc (NYSE:PRGO) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 27th of August, you won't be eligible to receive this dividend, when it is paid on the 15th of September.

Perrigo's upcoming dividend is US$0.23 a share, following on from the last 12 months, when the company distributed a total of US$0.90 per share to shareholders. Calculating the last year's worth of payments shows that Perrigo has a trailing yield of 1.7% on the current share price of $52.4. If you buy this business for its dividend, you should have an idea of whether Perrigo's dividend is reliable and sustainable. So we need to investigate whether Perrigo can afford its dividend, and if the dividend could grow.

See our latest analysis for Perrigo

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see Perrigo paying out a modest 49% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year, it paid out more than three-quarters (77%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's positive to see that Perrigo'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.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Perrigo's 7.3% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Perrigo has increased its dividend at approximately 14% a year on average.

Final Takeaway

Should investors buy Perrigo for the upcoming dividend? Its earnings per share have been declining meaningfully, although it is paying out less than half its income and more than half its cash flow as dividends. Neither payout ratio appears an immediate concern, but we're concerned about the earnings. In summary, it's hard to get excited about Perrigo from a dividend perspective.

With that being said, if dividends aren't your biggest concern with Perrigo, you should know about the other risks facing this business. To that end, you should learn about the 2 warning signs we've spotted with Perrigo (including 1 which is concerning).

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.

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. 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.

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