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It Might Not Be A Great Idea To Buy Kosmos Energy Ltd. (NYSE:KOS) For Its Next Dividend

Simply Wall St

Kosmos Energy Ltd. (NYSE:KOS) stock is about to trade ex-dividend in 3 days time. Ex-dividend means that investors that purchase the stock on or after the 4th of September will not receive this dividend, which will be paid on the 26th of September.

Kosmos Energy's next dividend payment will be US$0.045 per share. Last year, in total, the company distributed US$0.18 to shareholders. Last year's total dividend payments show that Kosmos Energy has a trailing yield of 2.9% on the current share price of $6.32. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Kosmos Energy

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Kosmos Energy distributed an unsustainably high 157% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Kosmos Energy generated enough free cash flow to afford its dividend.

Kosmos Energy paid a dividend despite reporting negative free cash flow over the last twelve months. This may be due to heavy investment in the business, but this is still suboptimal from a dividend sustainability perspective.

It's good to see that while Kosmos Energy's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

NYSE:KOS Historical Dividend Yield, August 31st 2019

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. Kosmos Energy's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 46% a year over the past five years.

This is Kosmos Energy's first year of paying a dividend, so it doesn't have much of a history yet to compare to.

Final Takeaway

Should investors buy Kosmos Energy for the upcoming dividend? Not only are earnings per share declining, but Kosmos Energy is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. Bottom line: Kosmos Energy has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Curious what other investors think of Kosmos Energy? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .

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.

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.