Dividend paying stocks like National Oilwell Varco, Inc. (NYSE:NOV) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
A slim 0.9% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, National Oilwell Varco could have potential. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Although National Oilwell Varco pays a dividend, it was loss-making during the past year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.
National Oilwell Varco's cash payout ratio in the last year was 34%, which suggests dividends were well covered by cash generated by the business.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. National Oilwell Varco has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This company's dividend has not fluctuated wildly, but its dividend per share payments have still decreased substantially over this time, which is not ideal. During the past ten-year period, the first annual payment was US$0.40 in 2010, compared to US$0.20 last year. This works out to be a decline of approximately 6.7% per year over that time.
When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. National Oilwell Varco's earnings per share have shrunk at 50% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and National Oilwell Varco's earnings per share, which support the dividend, have been anything but stable.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're not keen on the fact that National Oilwell Varco paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. Second, earnings per share have actually shrunk, but at least the dividends have been relatively stable. In sum, we find it hard to get excited about National Oilwell Varco from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.
Given that earnings are not growing, the dividend does not look nearly so attractive. See if the 26 analysts are forecasting a turnaround in our free collection of analyst estimates here.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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