Don't Race Out To Buy Isramco Negev 2 Limited Partnership (TLV:ISRA) Just Because It's Going Ex-Dividend

Readers hoping to buy Isramco Negev 2 Limited Partnership (TLV:ISRA) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Therefore, if you purchase Isramco Negev 2 Limited Partnership's shares on or after the 10th of June, you won't be eligible to receive the dividend, when it is paid on the 19th of June.

The company's next dividend payment will be US$0.02701 per share, on the back of last year when the company paid a total of US$0.032 to shareholders. Based on the last year's worth of payments, Isramco Negev 2 Limited Partnership stock has a trailing yield of around 7.1% on the current share price of ₪1.65. 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.

View our latest analysis for Isramco Negev 2 Limited Partnership

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Isramco Negev 2 Limited Partnership paid out more than half (56%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Isramco Negev 2 Limited Partnership generated enough free cash flow to afford its dividend. Over the last year, it paid out more than three-quarters (76%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's positive to see that Isramco Negev 2 Limited Partnership's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see how much of its profit Isramco Negev 2 Limited Partnership paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Isramco Negev 2 Limited Partnership's earnings per share have fallen at approximately 16% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Isramco Negev 2 Limited Partnership has seen its dividend decline 16% per annum on average over the past seven years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

Should investors buy Isramco Negev 2 Limited Partnership for the upcoming dividend? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. Bottom line: Isramco Negev 2 Limited Partnership has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Isramco Negev 2 Limited Partnership and want to know more, you'll find it very useful to know what risks this stock faces. We've identified 3 warning signs with Isramco Negev 2 Limited Partnership (at least 1 which doesn't sit too well with us), and understanding these should be part of your investment process.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.