Don't Race Out To Buy North European Oil Royalty Trust (NYSE:NRT) Just Because It's Going Ex-Dividend
Readers hoping to buy North European Oil Royalty Trust (NYSE:NRT) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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. Meaning, you will need to purchase North European Oil Royalty Trust's shares before the 12th of August to receive the dividend, which will be paid on the 25th of August.
The company's next dividend payment will be US$0.15 per share, and in the last 12 months, the company paid a total of US$0.32 per share. Last year's total dividend payments show that North European Oil Royalty Trust has a trailing yield of 4.3% on the current share price of $7.4. 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 North European Oil Royalty Trust can afford its dividend, and if the dividend could grow.
View our latest analysis for North European Oil Royalty Trust
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year, North European Oil Royalty Trust paid out 101% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. Dividends consumed 75% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and North European Oil Royalty Trust fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. 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 25% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
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 17% 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
From a dividend perspective, should investors buy or avoid North European Oil Royalty Trust? It's never fun to see a company's earnings per share in retreat. What's more, North European Oil Royalty Trust is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of North European Oil Royalty Trust.
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. Every company has risks, and we've spotted 5 warning signs for North European Oil Royalty Trust (of which 1 is significant!) you should know about.
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.
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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