Occidental Petroleum Corporation (NYSE:OXY) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 9th of September in order to be eligible for this dividend, which will be paid on the 15th of October.
Occidental Petroleum's upcoming dividend is US$0.79 a share, following on from the last 12 months, when the company distributed a total of US$3.16 per share to shareholders. Last year's total dividend payments show that Occidental Petroleum has a trailing yield of 7.4% on the current share price of $42.68. If you buy this business for its dividend, you should have an idea of whether Occidental Petroleum's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Occidental Petroleum paid out 61% of its earnings to investors last year, a normal payout level for most businesses. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the past year it paid out 120% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Occidental Petroleum paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Occidental Petroleum to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's not ideal to see Occidental Petroleum's earnings per share have been shrinking at 3.6% a year over the previous five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Occidental Petroleum has increased its dividend at approximately 9.5% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.
From a dividend perspective, should investors buy or avoid Occidental Petroleum? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
Curious what other investors think of Occidental Petroleum? 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.
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