Don't Buy Canadian Natural Resources Limited (TSE:CNQ) For Its Next Dividend Without Doing These Checks

By
Simply Wall St
Published
March 12, 2021
TSX:CNQ
Source: Shutterstock

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Canadian Natural Resources Limited (TSE:CNQ) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 18th of March in order to receive the dividend, which the company will pay on the 5th of April.

Canadian Natural Resources's next dividend payment will be CA$0.47 per share, and in the last 12 months, the company paid a total of CA$1.70 per share. Last year's total dividend payments show that Canadian Natural Resources has a trailing yield of 4.7% on the current share price of CA$40.2. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Canadian Natural Resources

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Canadian Natural Resources reported a loss last year, so it's not great to see that it has continued paying a dividend. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the 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. The company paid out 91% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

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

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TSX:CNQ Historic Dividend March 13th 2021

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. Canadian Natural Resources reported a loss last year, but at least the general trend suggests its income has been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

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, 10 years ago, Canadian Natural Resources has lifted its dividend by approximately 20% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

We update our analysis on Canadian Natural Resources every 24 hours, so you can always get the latest insights on its financial health, here.

To Sum It Up

Is Canadian Natural Resources an attractive dividend stock, or better left on the shelf? It's hard to get used to Canadian Natural Resources paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. Bottom line: Canadian Natural Resources has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Canadian Natural Resources as an investment, you'll find it beneficial to know what risks this stock is facing. To help with this, we've discovered 4 warning signs for Canadian Natural Resources that you should be aware of before investing in their shares.

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.

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