It looks like EOG Resources, Inc. (NYSE:EOG) is about to go ex-dividend in the next 3 days. You can purchase shares before the 16th of January in order to receive the dividend, which the company will pay on the 31st of January.
EOG Resources’s next dividend payment will be US$0.29 per share, and in the last 12 months, the company paid a total of US$1.15 per share. Based on the last year’s worth of payments, EOG Resources stock has a trailing yield of around 1.3% on the current share price of $86.27. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it’s growing.
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. EOG Resources paid out just 20% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 26% of the free cash flow it generated, which is a comfortable payout ratio.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
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 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 EOG Resources, with earnings per share up 5.0% on average over the last five years. Recent growth has not been impressive. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, EOG Resources has increased its dividend at approximately 15% a year on average. 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.
The Bottom Line
Should investors buy EOG Resources for the upcoming dividend? Earnings per share growth has been growing somewhat, and EOG Resources is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and EOG Resources is halfway there. It’s a promising combination that should mark this company worthy of closer attention.
Ever wonder what the future holds for EOG Resources? See what the 22 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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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