Don't Buy Seplat Energy Plc (LON:SEPL) For Its Next Dividend Without Doing These Checks

Seplat Energy Plc (LON:SEPL) stock is about to trade ex-dividend in 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Accordingly, Seplat Energy investors that purchase the stock on or after the 30th of May will not receive the dividend, which will be paid on the 14th of June.

The company's next dividend payment will be US$0.03 per share, on the back of last year when the company paid a total of US$0.15 to shareholders. Looking at the last 12 months of distributions, Seplat Energy has a trailing yield of approximately 7.1% on its current stock price of UK£1.655. 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.

Check out our latest analysis for Seplat Energy

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, Seplat Energy paid out 271% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year it paid out 75% of its free cash flow as dividends, within the usual range for most companies.

It's good to see that while Seplat Energy's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. 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?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Seplat Energy's earnings per share have fallen at approximately 30% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Seplat Energy has lifted its dividend by approximately 2.3% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Seplat Energy is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

The Bottom Line

Is Seplat Energy an attractive dividend stock, or better left on the shelf? It's never fun to see a company's earnings per share in retreat. Worse, Seplat Energy's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that in mind though, if the poor dividend characteristics of Seplat Energy don't faze you, it's worth being mindful of the risks involved with this business. Case in point: We've spotted 2 warning signs for Seplat Energy you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.