Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Aker BP ASA (OB:AKERBP) is about to trade ex-dividend in the next 3 days. You will need to purchase shares before the 1st of August to receive the dividend, which will be paid on the 9th of August.
The upcoming dividend for Aker BP will put a total of US$4.44 per share in shareholders’ pockets, up from last year’s total dividends of US$2.08. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it’s growing.
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. An unusually high payout ratio of 237% of its profit suggests something is happening other than the usual distribution of profits to shareholders. 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. Fortunately, it paid out only 46% of its free cash flow in the past year.
It’s disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Aker BP fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we’d view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It’s encouraging to see Aker BP has grown its earnings rapidly, up 62% a year for the past five years.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 3 years ago, Aker BP has lifted its dividend by approximately 41% a year on average. It’s exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
To Sum It Up
From a dividend perspective, should investors buy or avoid Aker BP? It’s good to see earnings per share growing and low cashflow payout ratio, although we’re uncomfortable with Aker BP’s paying out such a high percentage of its profit. In summary, it’s hard to get excited about Aker BP from a dividend perspective.
Wondering what the future holds for Aker BP? See what the 19 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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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. Thank you for reading.