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We Wouldn't Be Too Quick To Buy Woodside Petroleum Ltd (ASX:WPL) Before It Goes Ex-Dividend

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Woodside Petroleum Ltd (ASX:WPL) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 24th of February, you won't be eligible to receive this dividend, when it is paid on the 20th of March.

Woodside Petroleum's next dividend payment will be AU$0.55 per share. Last year, in total, the company distributed AU$0.91 to shareholders. Based on the last year's worth of payments, Woodside Petroleum has a trailing yield of 4.1% on the current stock price of A$33.23. If you buy this business for its dividend, you should have an idea of whether Woodside Petroleum's dividend is reliable and sustainable. As a result, readers should always check whether Woodside Petroleum has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Woodside Petroleum

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year, Woodside Petroleum paid out 248% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Dividends consumed 51% 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 covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

ASX:WPL Historical Dividend Yield, February 19th 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Woodside Petroleum's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 34% a year over the past five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. It looks like the Woodside Petroleum dividends are largely the same as they were ten years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

To Sum It Up

Should investors buy Woodside Petroleum for the upcoming dividend? It's never fun to see a company's earnings per share in retreat. What's more, Woodside Petroleum is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. It's not that we think Woodside Petroleum is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Ever wonder 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.

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.

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. Thank you for reading.