Dividend Investors: Don't Be Too Quick To Buy Gibson Energy Inc. (TSE:GEI) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Gibson Energy Inc. (TSE:GEI) is about to trade ex-dividend in the next four days. This means that investors who purchase shares on or after the 30th of December will not receive the dividend, which will be paid on the 15th of January.

Gibson Energy's next dividend payment will be CA$0.34 per share. Last year, in total, the company distributed CA$1.36 to shareholders. Based on the last year's worth of payments, Gibson Energy stock has a trailing yield of around 6.6% on the current share price of CA$20.75. 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! 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 Gibson Energy

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. Gibson Energy paid out 135% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Dividends consumed 74% 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 Gibson Energy'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. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Gibson Energy earnings per share are up 6.1% per annum over the last five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Gibson Energy has delivered an average of 3.9% per year annual increase in its dividend, based on the past nine years of dividend payments. 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

From a dividend perspective, should investors buy or avoid Gibson Energy? While earnings per share have been growing slowly, Gibson Energy is paying out an uncomfortably high percentage of its earnings. However it did pay out a lower percentage of its cashflow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Gibson Energy and want to know more, you'll find it very useful to know what risks this stock faces. For instance, we've identified 2 warning signs for Gibson Energy (1 shouldn't be ignored) you should be aware of.

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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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. 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.
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