Don't Buy North European Oil Royalty Trust (NYSE:NRT) For Its Next Dividend Without Doing These Checks
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see North European Oil Royalty Trust (NYSE:NRT) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Therefore, if you purchase North European Oil Royalty Trust's shares on or after the 10th of November, you won't be eligible to receive the dividend, when it is paid on the 24th of November.
The company's next dividend payment will be US$0.14 per share. Last year, in total, the company distributed US$0.47 to shareholders. Based on the last year's worth of payments, North European Oil Royalty Trust has a trailing yield of 5.9% on the current stock price of $8.03. 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 investigate whether North European Oil Royalty Trust can afford its dividend, and if the dividend could grow.
Check out our latest analysis for North European Oil Royalty Trust
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. North European Oil Royalty Trust paid out 111% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year, it paid out more than three-quarters (81%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.
It's good to see that while North European Oil Royalty Trust's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see North European Oil Royalty Trust's earnings per share have dropped 24% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. North European Oil Royalty Trust has seen its dividend decline 14% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.
To Sum It Up
Should investors buy North European Oil Royalty Trust for the upcoming dividend? Earnings per share have been shrinking in recent times. Worse, North European Oil Royalty Trust's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
With that in mind though, if the poor dividend characteristics of North European Oil Royalty Trust don't faze you, it's worth being mindful of the risks involved with this business. For example, North European Oil Royalty Trust has 5 warning signs (and 1 which is concerning) we think you should know about.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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.
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