Do These 3 Checks Before Buying Abu Dhabi National Oil Company for Distribution PJSC (ADX:ADNOCDIST) For Its Upcoming Dividend

Abu Dhabi National Oil Company for Distribution PJSC (ADX:ADNOCDIST) is about to trade ex-dividend in the next two days. The ex-dividend date is usually set to be two business days 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Abu Dhabi National Oil Company for Distribution PJSC's shares before the 3rd of April in order to receive the dividend, which the company will pay on the 24th of April.

The company's next dividend payment will be د.إ0.10285 per share, on the back of last year when the company paid a total of د.إ0.21 to shareholders. Last year's total dividend payments show that Abu Dhabi National Oil Company for Distribution PJSC has a trailing yield of 6.1% on the current share price of د.إ3.40. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Abu Dhabi National Oil Company for Distribution PJSC has been able to grow its dividends, or if the dividend might be cut.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Abu Dhabi National Oil Company for Distribution PJSC paid out 106% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Abu Dhabi National Oil Company for Distribution PJSC generated enough free cash flow to afford its dividend. It paid out 93% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

As Abu Dhabi National Oil Company for Distribution PJSC's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

View our latest analysis for Abu Dhabi National Oil Company for Distribution PJSC

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

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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Abu Dhabi National Oil Company for Distribution PJSC, with earnings per share up 2.4% on average over the last five years. Minimal earnings growth, combined with concerningly high payout ratios suggests that Abu Dhabi National Oil Company for Distribution PJSC is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last seven years, Abu Dhabi National Oil Company for Distribution PJSC has lifted its dividend by approximately 20% 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.

Final Takeaway

From a dividend perspective, should investors buy or avoid Abu Dhabi National Oil Company for Distribution PJSC? Abu Dhabi National Oil Company for Distribution PJSC is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. It's not that we think Abu Dhabi National Oil Company for Distribution PJSC is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Abu Dhabi National Oil Company for Distribution PJSC. For example, Abu Dhabi National Oil Company for Distribution PJSC has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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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.