Should You Buy Oil and Natural Gas Corporation Limited (NSE:ONGC) For Its Upcoming Dividend?

Oil and Natural Gas Corporation Limited (NSE:ONGC) stock is about to trade ex-dividend in 4 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. 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. This means that investors who purchase Oil and Natural Gas' shares on or after the 18th of August will not receive the dividend, which will be paid on the 28th of October.

The company's upcoming dividend is ₹0.50 a share, following on from the last 12 months, when the company distributed a total of ₹11.25 per share to shareholders. Last year's total dividend payments show that Oil and Natural Gas has a trailing yield of 6.3% on the current share price of ₹177.2. If you buy this business for its dividend, you should have an idea of whether Oil and Natural Gas's dividend is reliable and sustainable. As a result, readers should always check whether Oil and Natural Gas has been able to grow its dividends, or if the dividend might be cut.

Check out 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. Fortunately Oil and Natural Gas's payout ratio is modest, at just 40% of profit. A useful secondary check can be to evaluate whether Oil and Natural Gas generated enough free cash flow to afford its dividend. Dividends consumed 50% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

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?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, Oil and Natural Gas's earnings per share have been growing at 12% a year for the past five years. Oil and Natural Gas has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. This is a reasonable combination that could hint at some further dividend increases in the future.

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, 10 years ago, Oil and Natural Gas has lifted its dividend by approximately 5.6% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

To Sum It Up

From a dividend perspective, should investors buy or avoid Oil and Natural Gas? Earnings per share have grown at a nice rate in recent times and over the last year, Oil and Natural Gas paid out less than half its earnings and a bit over half its free cash flow. It's a promising combination that should mark this company worthy of closer attention.

In light of that, while Oil and Natural Gas has an appealing dividend, it's worth knowing the risks involved with this stock. To help with this, we've discovered 2 warning signs for Oil and Natural Gas that you should be aware of before investing in their shares.

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.