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Here's Why We're Wary Of Buying Scorpio Tankers Inc.'s (NYSE:STNG) For Its Upcoming Dividend

Simply Wall St

Scorpio Tankers Inc. (NYSE:STNG) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 9th of September will not receive this dividend, which will be paid on the 27th of September.

Scorpio Tankers'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. Based on the last year's worth of payments, Scorpio Tankers stock has a trailing yield of around 1.5% on the current share price of $26.35. If you buy this business for its dividend, you should have an idea of whether Scorpio Tankers's dividend is reliable and sustainable. So we need to investigate whether Scorpio Tankers can afford its dividend, and if the dividend could grow.

View our latest analysis for Scorpio Tankers

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Scorpio Tankers's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. 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 Scorpio Tankers 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. What's good is that dividends were well covered by free cash flow, with the company paying out 15% of its cash flow last year.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

NYSE:STNG Historical Dividend Yield, September 4th 2019

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Scorpio Tankers reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

We'd also point out that Scorpio Tankers issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Scorpio Tankers's dividend payments per share have declined at 39% per year on average over the past 9 years, which is uninspiring. 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.

Get our latest analysis on Scorpio Tankers's balance sheet health here.

Final Takeaway

Is Scorpio Tankers worth buying for its dividend? It's hard to get used to Scorpio Tankers paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Curious what other investors think of Scorpio Tankers? See what analysts 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.