Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Seplat Petroleum Development Company Plc (LON:SEPL) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Seplat Petroleum Development's shares on or after the 25th of May will not receive the dividend, which will be paid on the 10th of June.
The company's next dividend payment will be US$0.025 per share, on the back of last year when the company paid a total of US$0.10 to shareholders. Last year's total dividend payments show that Seplat Petroleum Development has a trailing yield of 7.4% on the current share price of £0.96. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
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. Seplat Petroleum Development paid out 108% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Seplat Petroleum Development generated enough free cash flow to afford its dividend. It paid out more than half (52%) of its free cash flow in the past year, which is within an average range for most companies.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Seplat Petroleum Development fortunately did generate enough cash to fund its dividend. 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.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Seplat Petroleum Development's flat earnings over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Seplat Petroleum Development has seen its dividend decline 2.6% per annum on average over the past seven years, which is not great to see.
To Sum It Up
Has Seplat Petroleum Development got what it takes to maintain its dividend payments? The company has not generated any growth in earnings per share over the seven-year timeframe we measured. Additionally, Seplat Petroleum Development is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
With that being said, if you're still considering Seplat Petroleum Development as an investment, you'll find it beneficial to know what risks this stock is facing. We've identified 4 warning signs with Seplat Petroleum Development (at least 1 which is potentially serious), and understanding these should be part of your investment process.
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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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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