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 Canadian Natural Resources Limited (TSE:CNQ) is about to go ex-dividend in just 4 days. This means that investors who purchase shares on or after the 19th of March will not receive the dividend, which will be paid on the 1st of April.
Canadian Natural Resources's next dividend payment will be CA$0.42 per share, and in the last 12 months, the company paid a total of CA$1.50 per share. Last year's total dividend payments show that Canadian Natural Resources has a trailing yield of 8.6% on the current share price of CA$19.85. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. 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. Fortunately Canadian Natural Resources's payout ratio is modest, at just 33% of profit. 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. Thankfully its dividend payments took up just 33% of the free cash flow it generated, which is a comfortable payout ratio.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Canadian Natural Resources earnings per share are up 4.8% per annum over the last five years. Recent earnings growth has been limited. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last ten years, Canadian Natural Resources has lifted its dividend by approximately 23% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
The Bottom Line
From a dividend perspective, should investors buy or avoid Canadian Natural Resources? Earnings per share have been growing moderately, and Canadian Natural Resources is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings growing faster, but Canadian Natural Resources is being conservative with its dividend payouts and could still perform reasonably over the long run. Canadian Natural Resources looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
So while Canadian Natural Resources looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Every company has risks, and we've spotted 4 warning signs for Canadian Natural Resources (of which 1 is potentially serious!) you should know about.
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.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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