ConocoPhillips Company (NYSE:COP) stock is about to trade ex-dividend in 3 days time. You will need to purchase shares before the 13th of February to receive the dividend, which will be paid on the 2nd of March.
ConocoPhillips's next dividend payment will be US$0.42 per share, on the back of last year when the company paid a total of US$1.68 to shareholders. Calculating the last year's worth of payments shows that ConocoPhillips has a trailing yield of 2.9% on the current share price of $57.99. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. ConocoPhillips has a low and conservative payout ratio of just 21% of its income after tax. A useful secondary check can be to evaluate whether ConocoPhillips generated enough free cash flow to afford its dividend. It distributed 34% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that ConocoPhillips'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.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at ConocoPhillips, with earnings per share up 6.8% on average over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. ConocoPhillips has seen its dividend decline 1.1% per annum on average over the past ten years, which is not great to see.
The Bottom Line
From a dividend perspective, should investors buy or avoid ConocoPhillips? Earnings per share growth has been growing somewhat, and ConocoPhillips is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and ConocoPhillips is halfway there. There's a lot to like about ConocoPhillips, and we would prioritise taking a closer look at it.
Ever wonder what the future holds for ConocoPhillips? See what the 14 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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