Imperial Oil Limited (TSE:IMO) stock is about to trade ex-dividend in 3 days time. You can purchase shares before the 3rd of September in order to receive the dividend, which the company will pay on the 1st of October.
Imperial Oil's next dividend payment will be CA$0.22 per share, on the back of last year when the company paid a total of CA$0.88 to shareholders. Calculating the last year's worth of payments shows that Imperial Oil has a trailing yield of 2.7% on the current share price of CA$32.6. If you buy this business for its dividend, you should have an idea of whether Imperial Oil's dividend is reliable and sustainable. So we need to investigate whether Imperial Oil can afford its dividend, and if the dividend could grow.
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. Imperial Oil is paying out just 20% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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. The good news is it paid out just 24% of its free cash flow in the last year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Imperial Oil, with earnings per share up 3.5% on average over the last five years. Growth has been anaemic. Yet with more than 75% of its earnings being kept in the business, there is ample room to reinvest in growth or lift the payout ratio - either of which could increase 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, Imperial Oil has increased its dividend at approximately 8.2% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Has Imperial Oil got what it takes to maintain its dividend payments? Earnings per share growth has been growing somewhat, and Imperial Oil 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. It might be nice to see earnings growing faster, but Imperial Oil is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Imperial Oil, and we would prioritise taking a closer look at it.
Curious what other investors think of Imperial Oil? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .
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.
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.
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. Thank you for reading.