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Why You Should Leave Woodside Petroleum Ltd (ASX:WPL)'s Upcoming Dividend On The Shelf

Simply Wall St

Readers hoping to buy Woodside Petroleum Ltd (ASX:WPL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 26th of August, you won't be eligible to receive this dividend, when it is paid on the 20th of September.

Woodside Petroleum's next dividend payment will be US$0.36 per share. Last year, in total, the company distributed US$1.27 to shareholders. Last year's total dividend payments show that Woodside Petroleum has a trailing yield of 5.8% on the current share price of A$32.18. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Woodside Petroleum has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Woodside Petroleum

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year Woodside Petroleum paid out 96% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Dividends consumed 67% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's good to see that while Woodside Petroleum's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

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

ASX:WPL Historical Dividend Yield, August 21st 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Woodside Petroleum's earnings per share have dropped 9.0% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Woodside Petroleum has lifted its dividend by approximately 4.5% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Woodside Petroleum is already paying out 96% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

From a dividend perspective, should investors buy or avoid Woodside Petroleum? Earnings per share have been in decline, which is not encouraging. Worse, Woodside Petroleum's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not that we think Woodside Petroleum is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Wondering what the future holds for Woodside Petroleum? See what the 11 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.

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.