It Might Not Be A Great Idea To Buy Saudi Arabian Oil Company (TADAWUL:2222) For Its Next Dividend

It looks like Saudi Arabian Oil Company (TADAWUL:2222) is about to go ex-dividend in the next 2 days. Typically, the ex-dividend date is two business days 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Saudi Arabian Oil's shares before the 22nd of May in order to be eligible for the dividend, which will be paid on the 29th of May.

The company's upcoming dividend is ر.س0.3312 a share, following on from the last 12 months, when the company distributed a total of ر.س1.82 per share to shareholders. Last year's total dividend payments show that Saudi Arabian Oil has a trailing yield of 6.9% on the current share price of ر.س26.15. If you buy this business for its dividend, you should have an idea of whether Saudi Arabian Oil's dividend is reliable and sustainable. So we need to investigate whether Saudi Arabian Oil can afford its dividend, and if the dividend could grow.

Our free stock report includes 1 warning sign investors should be aware of before investing in Saudi Arabian Oil. Read for free now.

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year Saudi Arabian Oil paid out 102% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Saudi Arabian Oil paid out more free cash flow than it generated - 140%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

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

See our latest analysis for Saudi Arabian Oil

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

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. With that in mind, we're encouraged by the steady growth at Saudi Arabian Oil, with earnings per share up 3.2% on average over the last five years. With limited earnings growth and paying out a concerningly high percentage of its earnings, the prospects of future dividend growth don't look so bright here.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Saudi Arabian Oil has delivered an average of 15% per year annual increase in its dividend, based on the past five years of dividend payments. 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.

Final Takeaway

Has Saudi Arabian Oil got what it takes to maintain its dividend payments? Saudi Arabian Oil is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. Bottom line: Saudi Arabian Oil has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Saudi Arabian Oil and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 1 warning sign for Saudi Arabian Oil you should know about.

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.