Peter Warren Automotive Holdings Limited (ASX:PWR) is reducing its dividend from last year's comparable payment to A$0.016 on the 26th of March. The dividend yield of 7.7% is still a nice boost to shareholder returns, despite the cut.

Check out our latest analysis for Peter Warren Automotive Holdings

Peter Warren Automotive Holdings' Payment Could Potentially Have Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, Peter Warren Automotive Holdings' dividend was higher than its profits, but the free cash flows quite comfortably covered it. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

The next year is set to see EPS grow by 56.0%. If the dividend continues along recent trends, we estimate the payout ratio will be 48%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Peter Warren Automotive Holdings' Dividend Has Lacked Consistency

Even in its short history, we have seen the dividend cut. Since 2022, the dividend has gone from A$0.18 total annually to A$0.12. The dividend has fallen 33% over that period. A company that decreases its dividend over time generally isn't what we are looking for.

Dividend Growth Is Doubtful

Dividends have been going in the wrong direction, so we definitely want to see a different trend in the earnings per share. In the last five years, Peter Warren Automotive Holdings' earnings per share has shrunk at approximately 8.1% per annum. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this can turn into a longer term trend.

The Dividend Could Prove To Be Unreliable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. This company is not in the top tier of income providing stocks.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 3 warning signs for Peter Warren Automotive Holdings (1 is a bit unpleasant!) that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.