Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Royal Dutch Shell plc (AMS:RDSA) is about to go ex-dividend in just three days. Ex-dividend means that investors that purchase the stock on or after the 13th of August will not receive this dividend, which will be paid on the 21st of September.
Royal Dutch Shell’s next dividend payment will be €0.16 per share, on the back of last year when the company paid a total of €0.64 to shareholders. Based on the last year’s worth of payments, Royal Dutch Shell stock has a trailing yield of around 4.2% on the current share price of €12.99. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Royal Dutch Shell reported a loss after tax last year, which means it’s paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Royal Dutch Shell didn’t generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Over the last year it paid out 63% of its free cash flow as dividends, within the usual range for most companies.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it’s easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Royal Dutch Shell was unprofitable last year, but at least the general trend suggests its earnings have been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Royal Dutch Shell’s dividend payments per share have declined at 9.2% per year on average over the past 10 years, which is uninspiring.
To Sum It Up
Has Royal Dutch Shell got what it takes to maintain its dividend payments? It’s hard to get used to Royal Dutch Shell paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. To summarise, Royal Dutch Shell looks okay on this analysis, although it doesn’t appear a stand-out opportunity.
However if you’re still interested in Royal Dutch Shell as a potential investment, you should definitely consider some of the risks involved with Royal Dutch Shell. Be aware that Royal Dutch Shell is showing 3 warning signs in our investment analysis, and 1 of those shouldn’t be ignored…
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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