PetroChina Company Limited (HKG:857) stock is about to trade ex-dividend in 4 days time. Ex-dividend means that investors that purchase the stock on or after the 16th of September will not receive this dividend, which will be paid on the 1st of November.
PetroChina's next dividend payment will be CN¥0.086 per share, on the back of last year when the company paid a total of CN¥0.17 to shareholders. Based on the last year's worth of payments, PetroChina has a trailing yield of 4.3% on the current stock price of HK$4.25. If you buy this business for its dividend, you should have an idea of whether PetroChina's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. PetroChina paid out more than half (53%) of its earnings last year, which is a regular payout ratio for most companies. 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. Fortunately, it paid out only 33% of its free cash flow in the past year.
It's positive to see that PetroChina's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. PetroChina's earnings per share have fallen at approximately 16% a year over the previous 5 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. PetroChina's dividend payments per share have declined at 5.0% per year on average over the past 10 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.
The Bottom Line
Has PetroChina got what it takes to maintain its dividend payments? We're not enthused by the declining earnings per share, although at least the company's payout ratio is within a reasonable range, meaning it may not be at imminent risk of a dividend cut. To summarise, PetroChina looks okay on this analysis, although it doesn't appear a stand-out opportunity.
Curious what other investors think of PetroChina? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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