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Readers hoping to buy Cabot Oil & Gas Corporation (NYSE:COG) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. This means that investors who purchase shares on or after the 10th of November will not receive the dividend, which will be paid on the 23rd of November.
Cabot Oil & Gas's next dividend payment will be US$0.10 per share, and in the last 12 months, the company paid a total of US$0.40 per share. Calculating the last year's worth of payments shows that Cabot Oil & Gas has a trailing yield of 2.5% on the current share price of $16.01. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Cabot Oil & Gas paid out more than half (74%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Cabot Oil & Gas generated enough free cash flow to afford its dividend. Over the past year it paid out 184% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
While Cabot Oil & Gas's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Cabot Oil & Gas's ability to maintain its dividend.
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 fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Cabot Oil & Gas's earnings per share have risen 17% per annum over the last five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Cabot Oil & Gas has lifted its dividend by approximately 30% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
To Sum It Up
Is Cabot Oil & Gas an attractive dividend stock, or better left on the shelf? The best dividend stocks typically boast a long history of growing earnings per share (EPS) via a combination of earnings growth and buybacks. So, you might think that Cabot Oil & Gas buying back stock, growing its EPS, and retaining profits within its business is a good combination. However, we note with some concern that it paid out 184% of its free cash flow last year, which is uncomfortably high and makes us wonder why the company chose to spend even more cash on buybacks. In summary, it's hard to get excited about Cabot Oil & Gas from a dividend perspective.
If you're not too concerned about Cabot Oil & Gas's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. Every company has risks, and we've spotted 4 warning signs for Cabot Oil & Gas you should know about.
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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