Why You Might Be Interested In SM Energy Company (NYSE:SM) For Its Upcoming Dividend
SM Energy Company (NYSE:SM) is about to trade ex-dividend in the next 3 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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. Therefore, if you purchase SM Energy's shares on or after the 20th of July, you won't be eligible to receive the dividend, when it is paid on the 7th of August.
The company's upcoming dividend is US$0.15 a share, following on from the last 12 months, when the company distributed a total of US$0.60 per share to shareholders. Based on the last year's worth of payments, SM Energy has a trailing yield of 1.9% on the current stock price of $32.43. 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 investigate whether SM Energy can afford its dividend, and if the dividend could grow.
Check out our latest analysis for SM Energy
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. SM Energy is paying out just 4.4% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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. The good news is it paid out just 5.4% of its free cash flow in the last year.
It's positive to see that SM Energy'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.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see SM Energy has grown its earnings rapidly, up 26% a year for the past five years. SM Energy earnings per share have been sprinting ahead like the Road Runner at a track and field day; scarcely stopping even for a cheeky "beep-beep". We also like that it is reinvesting most of its profits in its business.'
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, SM Energy has increased its dividend at approximately 20% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
The Bottom Line
Has SM Energy got what it takes to maintain its dividend payments? SM Energy has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. It's a promising combination that should mark this company worthy of closer attention.
While it's tempting to invest in SM Energy for the dividends alone, you should always be mindful of the risks involved. To help with this, we've discovered 1 warning sign for SM Energy that you should be aware of before investing in their shares.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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