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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Hess Midstream LP (NYSE:HESM) is about to go ex-dividend in just 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Hess Midstream's shares on or after the 6th of August will not receive the dividend, which will be paid on the 13th of August.
The company's next dividend payment will be US$0.50 per share. Last year, in total, the company distributed US$2.02 to shareholders. Looking at the last 12 months of distributions, Hess Midstream has a trailing yield of approximately 7.8% on its current stock price of $25.88. If you buy this business for its dividend, you should have an idea of whether Hess Midstream's dividend is reliable and sustainable. So we need to investigate whether Hess Midstream can afford its dividend, and if the dividend could grow.
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. Hess Midstream distributed an unsustainably high 117% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. Luckily it paid out just 7.6% of its free cash flow last year.
It's good to see that while Hess Midstream's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Hess Midstream has grown its earnings rapidly, up 28% a year for the past five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Hess Midstream has delivered an average of 14% per year annual increase in its dividend, based on the past four years of dividend payments. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
To Sum It Up
Is Hess Midstream an attractive dividend stock, or better left on the shelf? It's good to see earnings per share growing and low cashflow payout ratio, although we're uncomfortable with Hess Midstream's paying out such a high percentage of its profit. In summary, while it has some positive characteristics, we're not inclined to race out and buy Hess Midstream today.
In light of that, while Hess Midstream has an appealing dividend, it's worth knowing the risks involved with this stock. We've identified 4 warning signs with Hess Midstream (at least 1 which is a bit unpleasant), and understanding these should be part of your investment process.
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.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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