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Why It Might Not Make Sense To Buy Rattler Midstream LP (NASDAQ:RTLR) For Its Upcoming Dividend

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Rattler Midstream LP (NASDAQ:RTLR) stock is about to trade ex-dividend in 3 days. You can purchase shares before the 13th of May in order to receive the dividend, which the company will pay on the 21st of May.

Rattler Midstream's next dividend payment will be US$0.20 per share. Last year, in total, the company distributed US$0.80 to shareholders. Calculating the last year's worth of payments shows that Rattler Midstream has a trailing yield of 6.9% on the current share price of $11.55. If you buy this business for its dividend, you should have an idea of whether Rattler Midstream's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Rattler Midstream

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Rattler Midstream distributed an unsustainably high 117% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Rattler Midstream generated enough free cash flow to afford its dividend. Over the past year it paid out 173% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Cash is slightly more important than profit from a dividend perspective, but given Rattler Midstream's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

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

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. That's why we're optimistic about Rattler Midstream's earnings, which have ripped higher, up 2,296% over the past year. While we'd be remiss not to point out that a year is a very short time in dividend investing, it's an encouraging sign so far. Rattler Midstream's dividend was not well covered by earnings, although at least its earnings per share are growing quickly. Fast-growing businesses normally need to reinvest most of their earnings in order to maintain growth, so we'd suspect that either earnings growth will slow or the dividend may not be increased for a while.

We do note though, one year is too short a time to be drawing strong conclusions about a company's future growth prospects.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Rattler Midstream's dividend payments per share have declined at 11% per year on average over the past two years, which is uninspiring. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.

Final Takeaway

From a dividend perspective, should investors buy or avoid Rattler Midstream? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that being said, if you're still considering Rattler Midstream as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 2 warning signs for Rattler Midstream and you should be aware of these before buying any shares.

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.