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Why It Might Not Make Sense To Buy HollyFrontier Corporation (NYSE:HFC) For Its Upcoming Dividend

·4 min read

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see HollyFrontier Corporation (NYSE:HFC) is about to trade ex-dividend in the next four days. This means that investors who purchase shares on or after the 26th of February will not receive the dividend, which will be paid on the 10th of March.

HollyFrontier's next dividend payment will be US$0.35 per share, and in the last 12 months, the company paid a total of US$1.40 per share. Based on the last year's worth of payments, HollyFrontier has a trailing yield of 3.8% on the current stock price of $36.59. 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 HollyFrontier can afford its dividend, and if the dividend could grow.

View our latest analysis for HollyFrontier

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. HollyFrontier paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If HollyFrontier didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. It paid out 106% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

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 fall far enough, the company could be forced to cut its dividend. HollyFrontier was unprofitable last year, but at least the general trend suggests its earnings have been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, HollyFrontier has lifted its dividend by approximately 17% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Get our latest analysis on HollyFrontier's balance sheet health here.

Final Takeaway

From a dividend perspective, should investors buy or avoid HollyFrontier? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of HollyFrontier.

With that in mind though, if the poor dividend characteristics of HollyFrontier don't faze you, it's worth being mindful of the risks involved with this business. Be aware that HollyFrontier is showing 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.