Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Could Imperial Oil Limited (TSE:IMO) be an attractive dividend share to own for the long haul? Investors are often drawn to a company for its dividend. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.
A 2.3% yield is nothing to get excited about, but investors probably think the long payment history suggests Imperial Oil has some staying power. The company also bought back stock equivalent to around 6.5% of market capitalisation this year. There are a few simple ways to reduce the risks of buying Imperial Oil for its dividend, and we’ll go through these below.Click the interactive chart for our full dividend analysis
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 29% of Imperial Oil’s profits were paid out as dividends in the last 12 months. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Imperial Oil’s cash payout ratio last year was 24%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout.
Consider getting our latest analysis on Imperial Oil’s financial position here.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Imperial Oil’s dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was CA$0.40 in 2009, compared to CA$0.88 last year. Dividends per share have grown at approximately 8.2% per year over this time.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. It’s not great to see that Imperial Oil’s have fallen at approximately 4.6% over the past five years. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company’s dividend.
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. It’s great to see that Imperial Oil is paying out a low percentage of its earnings and cash flow. Second, earnings per share have actually shrunk, but at least the dividends have been relatively stable. Imperial Oil has a number of positive attributes, but it falls slightly short of our (admittedly high) standards. Were there evidence of a strong moat or an attractive valuation, it could still be well worth a look.
Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from costs or inflation. See if the 7 analysts are forecasting a turnaround in our free collection of analyst estimates here.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.