Don't Buy BHP Group Limited (ASX:BHP) For Its Next Dividend Without Doing These Checks

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see BHP Group Limited (ASX:BHP) is about to trade ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase BHP Group's shares before the 7th of March to receive the dividend, which will be paid on the 28th of March.

The company's upcoming dividend is US$0.72 a share, following on from the last 12 months, when the company distributed a total of US$1.65 per share to shareholders. Calculating the last year's worth of payments shows that BHP Group has a trailing yield of 5.6% on the current share price of AU$44.92. If you buy this business for its dividend, you should have an idea of whether BHP Group's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for BHP Group

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, BHP Group paid out 104% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Dividends consumed 72% 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 BHP Group's dividends were not covered by profits, at least they are affordable from a cash perspective. 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.

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

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 earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at BHP Group, with earnings per share up 3.2% on average over the last five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. BHP Group has delivered 3.4% dividend growth per year on average over the past 10 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

Is BHP Group an attractive dividend stock, or better left on the shelf? While earnings per share have been growing slowly, BHP Group is paying out an uncomfortably high percentage of its earnings. However it did pay out a lower percentage of its cashflow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

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 BHP Group. For example, we've found 4 warning signs for BHP Group that we recommend you consider before investing in the business.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.