Stock Analysis

Don't Buy Woodside Petroleum Ltd (ASX:WPL) For Its Next Dividend Without Doing These Checks

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ASX:WDS
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It looks like Woodside Petroleum Ltd (ASX:WPL) is about to go ex-dividend in the next four days. If you purchase the stock on or after the 24th of August, you won't be eligible to receive this dividend, when it is paid on the 18th of September.

Woodside Petroleum's upcoming dividend is AU$0.26 a share, following on from the last 12 months, when the company distributed a total of AU$0.81 per share to shareholders. Looking at the last 12 months of distributions, Woodside Petroleum has a trailing yield of approximately 5.5% on its current stock price of A$20.54. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Woodside Petroleum

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. Woodside Petroleum lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Thankfully its dividend payments took up just 32% of the free cash flow it generated, which is a comfortable payout ratio.

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

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ASX:WPL Historic Dividend August 19th 2020

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Woodside Petroleum was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Woodside Petroleum has seen its dividend decline 1.0% per annum on average over the past 10 years, which is not great to see.

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

Final Takeaway

From a dividend perspective, should investors buy or avoid Woodside Petroleum? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

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 Woodside Petroleum. Case in point: We've spotted 2 warning signs for Woodside Petroleum you should be aware of.

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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