Dividend Investors: Don't Be Too Quick To Buy Diamondback Energy, Inc. (NASDAQ:FANG) For Its Upcoming Dividend

By
Simply Wall St
Published
February 26, 2021
NasdaqGS:FANG

Diamondback Energy, Inc. (NASDAQ:FANG) stock is about to trade ex-dividend in 4 days. Investors can purchase shares before the 3rd of March in order to be eligible for this dividend, which will be paid on the 11th of March.

Diamondback Energy's next dividend payment will be US$0.40 per share, on the back of last year when the company paid a total of US$1.60 to shareholders. Looking at the last 12 months of distributions, Diamondback Energy has a trailing yield of approximately 2.3% on its current stock price of $69.06. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Diamondback Energy has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Diamondback Energy

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. Diamondback Energy lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Over the last year, it paid out dividends equivalent to 319% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since Diamondback Energy is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

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

historic-dividend
NasdaqGS:FANG Historic Dividend February 26th 2021

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Diamondback Energy reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, three years ago, Diamondback Energy has lifted its dividend by approximately 47% a year on average.

Remember, you can always get a snapshot of Diamondback Energy's financial health, by checking our visualisation of its financial health, here.

The Bottom Line

Is Diamondback Energy worth buying for its dividend? It's hard to get used to Diamondback Energy paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Although, if you're still interested in Diamondback Energy and want to know more, you'll find it very useful to know what risks this stock faces. To help with this, we've discovered 2 warning signs for Diamondback Energy that you should be aware of before investing in their 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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