It looks like Encana Corporation (TSE:ECA) is about to go ex-dividend in the next 3 days. Investors can purchase shares before the 12th of September in order to be eligible for this dividend, which will be paid on the 30th of September.
Encana's next dividend payment will be US$0.019 per share, and in the last 12 months, the company paid a total of US$0.075 per share. Last year's total dividend payments show that Encana has a trailing yield of 1.7% on the current share price of CA$5.96. 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 Encana can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Encana has a low and conservative payout ratio of just 6.6% of its income after tax. A useful secondary check can be to evaluate whether Encana generated enough free cash flow to afford its dividend. The good news is it paid out just 17% of its free cash flow in the last year.
It's positive to see that Encana's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Encana's earnings have been skyrocketing, up 26% per annum for the past five years. Encana looks like a real growth company, with earnings per share growing at a cracking pace and the company reinvesting most of its profits in the business.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Encana has seen its dividend decline 26% per annum on average over the past 10 years, which is not great to see. Encana is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
Should investors buy Encana for the upcoming dividend? Encana has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past ten years, but the conservative payout ratio makes the current dividend look sustainable. There's a lot to like about Encana, and we would prioritise taking a closer look at it.
Wondering what the future holds for Encana? See what the 14 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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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.