Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a given company to understand the quality of its dividend and how that's changed over the past five years.
The company we're looking at today is Permian Basin Royalty Trust
Permian Basin Royalty Trust is a royalty trust of oil fields in -- who would have guessed? -- the Permian Basin, which has seen some activity this year with Vanguard Natural Resoures'
To evaluate the quality of a dividend, the first thing to consider is whether the company has paid a dividend consistently over the past five years, and, if so, how much has it grown.
Permian Basin Royalty Trust moves in line with the trust's production and realized prices on its sales of oil.
The other tools we use to evaluate the safety of a dividend are:
- The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend.
- The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business' health. The FCF payout ratio measures the percentage of free cash flow devoted to paying the dividend.
Source: S&P Capital IQ.
As a trust, the company passes through its income to trust holders, and as such, the trust has a payout ratio of 100%.
Source: S&P Capital IQ.
There are some alternatives in the industry. San Juan Basin Royalty Trust
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Follow Dan Dzombak on Twitter at @DanDzombak to check out his musings and see what articles he finds interesting. The Motley Fool owns shares of Denbury Resources. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.