Phillips 66 (NYSE:PSX) Could Be A Buy For Its Upcoming Dividend

Readers hoping to buy Phillips 66 (NYSE:PSX) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Meaning, you will need to purchase Phillips 66's shares before the 20th of August to receive the dividend, which will be paid on the 3rd of September.

The company's upcoming dividend is US$1.15 a share, following on from the last 12 months, when the company distributed a total of US$4.60 per share to shareholders. Looking at the last 12 months of distributions, Phillips 66 has a trailing yield of approximately 3.3% on its current stock price of US$137.70. 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! So we need to investigate whether Phillips 66 can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Phillips 66

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. That's why it's good to see Phillips 66 paying out a modest 36% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fortunately, it paid out only 44% of its free cash flow in the past year.

It's positive to see that Phillips 66's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. 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 not enthused to see that Phillips 66's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. 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. Phillips 66 has delivered an average of 11% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Final Takeaway

Should investors buy Phillips 66 for the upcoming dividend? Earnings per share have been flat over this time, but we're intrigued to see that Phillips 66 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 strong earnings per share growth with a low payout ratio, and Phillips 66 is halfway there. Overall we think this is an attractive combination and worthy of further research.

In light of that, while Phillips 66 has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 2 warning signs for Phillips 66 and you should be aware of these before buying any shares.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.