It looks like Imperial Oil Limited (TSE:IMO) is about to go ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 3rd of September will not receive this dividend, which will be paid on the 1st of October.
Imperial Oil’s next dividend payment will be CA$0.22 per share, on the back of last year when the company paid a total of CA$0.88 to shareholders. Looking at the last 12 months of distributions, Imperial Oil has a trailing yield of approximately 2.7% on its current stock price of CA$32.6. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Imperial Oil has been able to grow its dividends, or if the dividend might be cut.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Imperial Oil has a low and conservative payout ratio of just 20% of its income after tax. 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. What’s good is that dividends were well covered by free cash flow, with the company paying out 24% of its cash flow last year.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
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 Imperial Oil, with earnings per share up 3.5% on average over the last five years. Growth has been anaemic. Yet with more than 75% of its earnings being kept in the business, there is ample room to reinvest in growth or lift the payout ratio – either of which could increase the dividend.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, ten years ago, Imperial Oil has lifted its dividend by approximately 8.2% a year on average. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Is Imperial Oil an attractive dividend stock, or better left on the shelf? Earnings per share have been growing moderately, and Imperial Oil is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Imperial Oil is halfway there. It’s a promising combination that should mark this company worthy of closer attention.
Ever wonder what the future holds for Imperial Oil? See what the seven analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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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.