Be Sure To Check Out Oil and Natural Gas Corporation Limited (NSE:ONGC) Before It Goes Ex-Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Oil and Natural Gas Corporation Limited (NSE:ONGC) is about to trade ex-dividend in the next 4 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Meaning, you will need to purchase Oil and Natural Gas' shares before the 20th of November to receive the dividend, which will be paid on the 11th of December.

The company's next dividend payment will be ₹6.00 per share, and in the last 12 months, the company paid a total of ₹12.25 per share. Calculating the last year's worth of payments shows that Oil and Natural Gas has a trailing yield of 4.9% on the current share price of ₹250.80. 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 investigate whether Oil and Natural Gas can afford its dividend, and if the dividend could grow.

See our latest analysis for Oil and Natural Gas

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. Oil and Natural Gas paid out a comfortable 38% of its profit last year. 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 54% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that Oil and Natural Gas'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 the company's payout ratio, plus analyst estimates of its future dividends.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Oil and Natural Gas earnings per share are up 6.5% per annum over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Oil and Natural Gas has lifted its dividend by approximately 6.8% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

Should investors buy Oil and Natural Gas for the upcoming dividend? Earnings per share have been growing at a steady rate, and Oil and Natural Gas paid out less than half its profits and more than half its free cash flow as dividends over the last year. To summarise, Oil and Natural Gas looks okay on this analysis, although it doesn't appear a stand-out opportunity.

While it's tempting to invest in Oil and Natural Gas for the dividends alone, you should always be mindful of the risks involved. For example - Oil and Natural Gas has 1 warning sign we think you should be aware of.

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.