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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Marathon Oil Corporation (NYSE:MRO) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 17th of November in order to receive the dividend, which the company will pay on the 10th of December.
Marathon Oil's next dividend payment will be US$0.03 per share, on the back of last year when the company paid a total of US$0.12 to shareholders. Last year's total dividend payments show that Marathon Oil has a trailing yield of 2.4% on the current share price of $5.07. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Marathon Oil can afford its dividend, and if the dividend could grow.
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. Marathon Oil paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If Marathon Oil didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Marathon Oil paid out more free cash flow than it generated - 163%, to be precise - last year, which we think is concerningly 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.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Marathon Oil reported a loss last year, but at least the general trend suggests its income has been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Marathon Oil has seen its dividend decline 19% per annum on average over the past 10 years, which is not great to see.
We update our analysis on Marathon Oil every 24 hours, so you can always get the latest insights on its financial health, here.
To Sum It Up
Has Marathon Oil got what it takes to maintain its dividend payments? It's hard to get used to Marathon Oil paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Although, if you're still interested in Marathon Oil and want to know more, you'll find it very useful to know what risks this stock faces. To that end, you should learn about the 2 warning signs we've spotted with Marathon Oil (including 1 which is potentially serious).
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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