Don't Buy Saudi Arabian Oil Company (TADAWUL:2222) For Its Next Dividend Without Doing These Checks

By
Simply Wall St
Published
May 06, 2021
SASE:2222
Source: Shutterstock

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Saudi Arabian Oil Company (TADAWUL:2222) is about to trade ex-dividend in the next 3 days. You will need to purchase shares before the 11th of May to receive the dividend, which will be paid on the 2nd of June.

Saudi Arabian Oil's next dividend payment will be ر.س0.35 per share. Last year, in total, the company distributed ر.س1.41 to shareholders. Last year's total dividend payments show that Saudi Arabian Oil has a trailing yield of 4.0% on the current share price of SAR35.6. 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.

View our latest analysis for Saudi Arabian Oil

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Saudi Arabian Oil distributed an unsustainably high 141% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Saudi Arabian Oil generated enough free cash flow to afford its dividend. Over the past year it paid out 143% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Cash is slightly more important than profit from a dividend perspective, but given Saudi Arabian Oil's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
SASE:2222 Historic Dividend May 7th 2021

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by Saudi Arabian Oil's 11% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Given that Saudi Arabian Oil has only been paying a dividend for a year, there's not much of a past history to draw insight from.

The Bottom Line

From a dividend perspective, should investors buy or avoid Saudi Arabian Oil? Not only are earnings per share declining, but Saudi Arabian Oil is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It's not that we think Saudi Arabian Oil is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in Saudi Arabian Oil despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 2 warning signs for Saudi Arabian Oil and you should be aware of these before buying any shares.

If you're in the market for dividend stocks, we recommend checking our list of top 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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Simply Wall St

Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.