Readers hoping to buy Schlumberger Limited (NYSE:SLB) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 3rd of September in order to be eligible for this dividend, which will be paid on the 11th of October.
Schlumberger's upcoming dividend is US$0.50 a share, following on from the last 12 months, when the company distributed a total of US$2.00 per share to shareholders. Last year's total dividend payments show that Schlumberger has a trailing yield of 6.2% on the current share price of $32.26. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Schlumberger paid out 132% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. The company paid out 109% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.
As Schlumberger's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Schlumberger's 22% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Schlumberger has lifted its dividend by approximately 9.1% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Schlumberger is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
From a dividend perspective, should investors buy or avoid Schlumberger? Not only are earnings per share declining, but Schlumberger 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: Schlumberger has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Ever wonder what the future holds for Schlumberger? See what the 30 analysts we track 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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