Tullow Oil plc (LON:TLW) is about to trade ex-dividend in the next 3 days. You will need to purchase shares before the 29th of August to receive the dividend, which will be paid on the 4th of October.
Tullow Oil's upcoming dividend is US$0.024 a share, following on from the last 12 months, when the company distributed a total of US$0.048 per share to shareholders. Calculating the last year's worth of payments shows that Tullow Oil has a trailing yield of 1.9% on the current share price of £2.069. If you buy this business for its dividend, you should have an idea of whether Tullow Oil's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see Tullow Oil paying out a modest 50% of its earnings. 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. The good news is it paid out just 13% of its free cash flow in the last year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Tullow Oil's 12% per annum decline in earnings in 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. Tullow Oil's dividend payments per share have declined at 5.2% per year on average over the past 10 years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
To Sum It Up
Is Tullow Oil worth buying for its dividend? Tullow Oil has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. To summarise, Tullow Oil looks okay on this analysis, although it doesn't appear a stand-out opportunity.
Wondering what the future holds for Tullow Oil? See what the 17 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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